If a company is in crisis, it must prove to investors that it’s willing to take drastic measures to turn its fortunes around. Sometimes a board will decide the only appropriate course of action is to install a new face at the top of the organisation. Last year, like most, provided a number of examples of the practice.
Thames Water, the UK’s largest water group, was one such company, as it attempted to show its ongoing struggles with its debt burden, supply operations, corporate structure and the sewage scandal would not prove fatal. In December it was revealed that Chris Weston, the former head of power solutions firm Aggreko, would be stepping into the top job.
The timing of this appointment, coming just days after Thames Water apologised to MPs for comments about the nature of an early 2023 funding injection, may have been a complete coincidence, but there’s no doubt having someone new at the helm can put shareholders’ minds at ease. At least this appears to be the case at publicly-listed companies, where the arrival of a new CEO is often accompanied by tough talk, a spike on the date the change is announced, or both.
The most obvious example last year was at Rolls-Royce (RR.). New boss Tufan Erginbilgiç was appointed in July 2022, taking over on 1 January last year. His now-infamous internal broadcast in which he labelled business a "burning platform" came just weeks later. But Rolls-Royce soon began to accelerate, and the company's shares are up 200 per cent over the past year. We have argued, however, that the basis for this transformation was in place before Erginbilgiç took charge.
In other cases, even the initial share price bounce can prove cosmetic. Shares in the German pharmaceutical giant Bayer (DE:BAYR) reached almost €66 (£57) apiece last February – their highest level in 2023 – when it was revealed that a former Roche (CH:ROG) executive would take up the top job.
However, Bayer’s stock is now languishing around the €35 mark after a series of setbacks for the company late last year. First, it was ordered to pay more than $1.5bn (£1.3bn) to claimants in the US who alleged that the group’s pesticide Roundup caused their cancers. Shortly after, it abandoned trials of a promising blood-thinning drug known as asundexian on concerns about its efficacy. The shares immediately toppled a further 18 per cent.
Neither outcome was within the control of new CEO Bill Anderson – but it’s safe to say that the bullish sentiments that accompanied his arrival vanished quickly. Problems that pre-dated Anderson have plagued his tenure to date. The lesson for investors is not to be tempted to believe that the appointment of a new chief executive is the start of a prosperous era. Skilled as they may be, one person isn't always enough to steer a ship off of a perilous course.
This certainly appears to be the case for Disney (US:DIS), which famously reappointed retired CEO Bob Iger only 11 months after he stepped down in 2020. His chosen successor, Bob Chapek, presided over a difficult period for the company, which saw its theme parks and cruise lines close down during the pandemic lockdowns. Its streaming business also massively underperformed the group’s own forecasts, and became a multi-billion dollar lossmaker.
The board concluded that the only solution was to bring Iger back into the fold. Again, the move seemed to please investors and Wall Street analysts, with Disney’s shares rising 6 per cent on the day his return was announced. However, it has not exactly been smooth sailing since. Disney’s shares are now trading at around $91 each – roughly the same price they were in the days prior to Iger’s reappointment.
On the other hand, there are obvious indicators that the financial health of the business is improving. It achieved fourth-quarter earnings per share of 82¢ – well above Wall Street consensus of 70¢. Meanwhile, losses in the streaming division came in at $387mn – down from nearly $1.5bn in the prior year – and the dividend was reinstated. FactSet broker consensus puts Disney’s price/earnings (PE) multiple at 21 times for the 2024 financial year, suggesting that it's not exactly undervalued in relation to its projected earnings.
But it’s nonetheless something of a bargain when compared to its FY22 PE multiple of almost 27 times. Investors are clearly treading carefully around the company as Iger attempts to stabilise it.
That’s not to say that chief executives parachuted in at times of turmoil never manage to deliver for investors. For an example, look further down the market cap scale to medical devices group Convatec (CTEC). Shares in the company have climbed from 175p to 244p since Karim Bitar began as CEO in September 2019, having already bounced on news of his arrival six months earlier. Analysts said the company had been “starved of investment” under the previous regime, and Bitar, previously chief executive at Genus (GNS), rapidly implemented a turnaround strategy once he was in post.
The aim was to zero in on the chronic diseases market while selling off less profitable divisions. While these improvements were executed over the course of several years, they do serve as evidence that a new CEO can make the difference to a company and its shareholders – provided the circumstances are right.
As a maker of critical medical supplies, such as wound care products, ConvaTec operates in a defensive market. It also managed to dispose of underperforming business lines to refocus on its strengths, doing so at decent prices and with a minimum of fuss. Not every company will have these luxuries.
