What happens when a CEO exits ?
On the day Microsoft (NASDAQ: MSFT) CEO Steve Ballmer announced that he would retire, the stock price jumped 7.3%. Is that a harbinger of what is to come for the high-tech giant or just a temporary bounce that typically happens when a CEO who has not been successful leaves the company?
Since Mr. Ballmer succeeded the legendary Bill Gates in the executive suite in 2000 Microsoft's stock has not performed well, declining 40%. In spite of revenue and earnings growth of 33% and 60% , respectively, over the past five years the stock has only gained 17%, trailing both the S&P500 (29%) and NASDAQ Composite (55%) indices.
Mr. Ballmer has overseen a few successful products during his tenure, like Xbox, but there have been some duds too, such as Vista. Although WIndows 8 has sold well and positively contributed to the bottom line there have been some negative reviews of the latest PC operating system from users and tech experts. He has also nixed many potentially successful projects, including a tablet several months before the iPad was introduced! Microsoft has probably failed to capitalize fully on the mobile revolution during his tenure.
So it is probably a good idea that new blood is taking over at Microsoft to try to right the ship. Getting in on the mobile bandwagon might be a good place to start for the new chief. Xbox probably won't save Microsoft. After a new strategy is announced, maybe an investment decision will become clearer. How have other companies performed after the CEO has left?
Apple of your eye
On Aug. 25, 2011, Steve Jobs stepped down from the top post at Apple (NASDAQ: AAPL) due to health issues. He passed away a couple of months later. Current CEO Tim Cook was his hand-picked successor. He was an operational star for the company for many years. However, can he duplicate the product innovation that Mr. Jobs brought to the table? New offerings from Apple seem to have dried up. Only incremental improvements to the iPhone, iPad, and Mac have been made within the past two years. And over the past year, diluted quarterly earnings have dropped by 13% and the stock price has plummeted from $705 to $385. It has recovered a bit to around $500 over the last few weeks.
One thing helping shares is the company buying back more of its own stock. Apple probably needs to hit a home run and continue the success that the company experienced while Mr. Jobs ruled the roost. Can Mr. Cook step up to the plate and help Apple reach the fences? There are rumors of innovative products like the "iWatch" and "iTV" in the works. Hopefully the two new iPhones, the 5s and 5c, will help things. This will certainly be welcome news to investors.
The world's leading computer manufacturer, Hewlett-Packard (NYSE: HPQ), has seen a parade in the CEO office over the last decade or so. Carly Fiorina, Mark Hurd and Leo Apotheker have come and gone. The current leader is Meg Whitman. All have tried to reverse fortunes caused in part by declining PC sales. None have really succeeded. Throw in a few scandals and H-P seemed to be in big trouble.
Ms. Whitman took over two years ago and is attempting to stem the tide by focusing on HP's services segment, which represents 40% of the current stock value according to Trefis. Although earnings are still below par shares have recovered from the low of last year, rising by 32%. As Ms. Whitman continues to implement her new strategy, expect H-P to provide better value to investors. The improvement may be a bit uneven over the short term (for example, the latest quarterly results were disappointing), so investors need to be patient. It takes time to undo years of sub-par performance and the significant headwinds created by the decline of the PC market.
Strong leadership is an important consideration when making an investment. Making a change at the top can be a catalyst for improvement. In the case of Microsoft, will the company follow the example of H-P and improve for the better? Whoever is selected to replace Mr. Ballmer needs to focus the tech giant to address emerging trends in the industry and take chances on new technology. In the case of Apple, the company didn't have a choice in whether it needed a new CEO or not. Hopefully, Mr. Cook can guide the company out of the doldrums. New product offerings will be key. Personally I have confidence Apple will succeed.