Thursday, September 7, 2006

CEOs in the Hot Seat

News Analysis
September 7, 2006

Business Week Online

CEOs in the Hot Seat

Blue chips Ford and Viacom just sacked their chief executives after lackluster stock performance. Who could be next?

These are trying times for chief executives with underwhelming stock prices. On Sept. 5, Viacom announced that Tom Freston had resigned as president and CEO (see, 9/6/06, "What Freston's Departure Means for Viacom"). Later the same day, Bill Ford ended a troubled five-year run as CEO of Ford Motor (see, 9/6/06, "Ford's Latest Recall"). The automaker named Alan Mulally, previously No. 2 executive at Boeing (BA ), as its new president and CEO. Ford will stay on as executive chairman.

With many blue chips treading water, Viacom (VIA , VIA.B ) and Ford (F ) probably aren't the only big companies eyeing C-level shakeups. This week's Five for the Money looks at five CEOs who could be vulnerable due to lackluster stock prices, shareholder pressure, or other factors.

1. Richard Parsons, Time Warner
Time might be running out for Richard Parsons, CEO and chairman at Time Warner (TWX ). The New York media conglomerate's share price has fallen 8.3%, adjusted for dividends, since the day before Parsons became CEO on May 15, 2002. The broader Standard & Poor's 500 index has gained 18.5% over the same period.

Parsons took over at Time Warner Center in the messy aftermath of the company's ill-fated AOL acquisition. "Parsons pulled Time Warner through the turmoil," notes Morningstar (MORN ) analyst Jonathan Schrader. "However, we're not sure that he has what it takes to unlock significant value at Time Warner." Schrader has a perfect five-star rating on the stock, but he gives its corporate stewardship a mediocre "C" grade.

For months, billionaire investor Carl Icahn pushed to oust Parsons and split up Time Warner. He dropped the effort in February after reaching an agreement with management. The shareholder activist isn't going away, however, and in August he boosted his Time Warner holdings to 49.6 million shares, or around 1.2% of the total (see, 8/14/06, "Carl Icahn Increases Time Warner Stake").

With a breakup off the table for now, the pressure is on Parsons. "We think investors will increasingly look at management to improve operations at each of its businesses," says Citigroup (C ) analyst Jason Bazinet in an Aug. 18 report. Bazinet has a buy recommendation on the shares. (Citigroup has an investment banking relationship with Time Warner, owns 1% or more of the company's shares, and makes a market in its securities.)

It's not as if Time Warner has been sitting on its hands. The company is in the midst of buying back up to $20 billion of its shares. And on Aug. 2, Time Warner announced that most AOL services would now be free to broadband users, in the latest effort to shore up the struggling Internet services provider (see, 9/5/06, "AOL—Crashing").

Parsons plans to stay at least until his contract wraps up at the end of 2008, according to Time Warner spokesman Edward Adler. Meanwhile, Time Warner's stock continues to lag, underperforming both News Corp. (NWS ) and Disney (DIS ) so far this year. The New York Times and New York magazine recently suggested Parsons could go into public service, whether on a federal level or in a bid for mayor of New York City.

2. Robert Nardelli, Home Depot
Could Home Depot's (HD) corner office be due for a remodel? Since the day before Chairman and CEO Robert Nardelli's arrival on Dec. 14, 2000, the Atlanta-based home-improvement retailer's dividend-adjusted share price has slid 20.9%. Arch-rival Lowe's (LOW ) is up 164%.

Critics have hammered Nardelli for his hefty pay package. In 2005, the former General Electric (GE ) executive took home $38.1 million in total pay (see, 5/23/06, "Home Depot's CEO Cleans Up"). "Management compensation is excessive," says Morningstar analyst Anthony Chukumba, who gives the stock a perfect five-star rating but a "D" for corporate stewardship.

The annual shareholder meeting on May 25 only intensified the heat on Home Depot's CEO (see BusinessWeek, 7/24/06, "Bob Nardelli Explains Himself"). Nardelli was the only board member to attend the event, and he declined to answer questions, wrapping the event up in 30 minutes.

The retailer has also gotten enmeshed in the SEC's stock-options probe, though executives have said they don't foresee a "material adverse impact." The AFL-CIO, a Home Depot shareholder, wrote a letter June 29 calling for the resignation of Kenneth Langone, a director who served on the committee overseeing stock options. The labor federation is set to meet with Home Depot officials on Sept. 7.

The stock's malaise notwithstanding, Home Depot has nailed down solid financial results during Nardelli's tenure. Sales rose from $45.7 billion in 2000 to $81.5 billion in 2005, a 78% increase, while per-share earnings jumped 147%. "His performance over the past five years speaks for itself," says company spokesman David Sandor, who notes that Nardelli enjoys the board of directors' support. "Stock price isn't something that is within the direct control of any chief executive."

Recently, Home Depot has taken some steps to answer its naysayers. On Aug. 15, the fix-it chain reversed a first-quarter decision to stop disclosing same-store sales, a key retail benchmark. On Aug. 29, the company said it revised its bylaws to require that each director be elected by a majority vote, not just a plurality. The company also recently boosted its stock buyback program to $17.5 billion. As of Sept. 1, Institutional Shareholder Services (ISS) rated Home Depot's corporate governance above 99.8% of S&P 500 companies.

Still, not even an ambitious share repurchase program has been able to boost the company's stock price. Challenges remain, as Home Depot's new wholesale business looks to expand while the big orange stores weather a housing-market slowdown. If the stock continues to languish, shareholders could demand some retooling.

3. Kevin Rollins, Dell
Dell's (DELL) Kevin Rollins is another CEO having trouble booting up his company's stock price. Shares of the Round Rock (Tex.)-based computer maker have tumbled 37.6% since the day before Rollins became CEO on July 17, 2004. Rival Hewlett-Packard's (HPQ ) shares are up 87.3%, adjusted for dividends, while Apple's (AAPL ) more than tripled.

Dell has endured one mishap after another this summer (see BusinessWeek, 9/4/06, "Dark Days at Dell"). On Aug. 17, disappointing second-quarter earnings were reported just three days after a recall of 4.1 million laptop batteries. The company also disclosed that the SEC is looking into its accounting practices.

The rash of bad news would be less disconcerting if profits were still rising (see, 8/18/06, "Dell Disappoints Once More"). However, slimmer margins and tougher competition could put the brakes on earnings growth, some analysts say. On Aug. 18, UBS (UBS ) downgraded the stock from neutral to reduce. "We believe struggles can be largely attributed to company-specific issues," says UBS analyst Benjamin Reitzes in an Aug. 17 report. (UBS has an investment banking relationship with Dell and makes a market in the company's securities.)

Dell has also been moving from its exclusive relationship with Intel (INTC ) and using more chips from Advanced Micro Devices (AMD). Some analysts attributed a second-quarter drop in gross margin to this changing relationship. "We believe Dell likely lost significant 'co-marketing' dollars from Intel this quarter, either as a result of Dell's decision to start using AMD processors or resulting from AMD's lawsuit against Intel," says Deutsche Bank (DB ) analyst Chris Whitmore in an Aug. 17 report. (Deutsche has a non-investment banking relationship with Dell, owns 1% or more of the company's shares, and makes a market in its securities.)

In mid-August, Rollins found himself fielding questions on CNBC about how long he would remain in his position. Dell spokesman Bob Pearson says such speculation is unfounded. "Kevin's got [company founder] Michael Dell's full support, and 98% of the shareholders voted in favor of Kevin at our shareholder meeting in July," Pearson says. "This speaks for itself."

Rollins is no Dell newcomer. He joined the company in 1996 from consultancy Bain & Co. before taking over as CEO from Michael Dell, who remains as chairman. Still, with big institutional investors such as Fidelity trimming their stakes, the pressure is on for the computer maker to deliver.

4. William Johnson, Heinz
Condiment king Heinz's (HNZ) stock has had some mustard on it lately. Shares of the Pittsburgh-based company have risen 27.6% since Feb. 6. That's when speculation arose about financier Nelson Peltz's activist involvement in the stock.

Before that, Heinz's stock performance gave investors less to relish (see BusinessWeek, 6/30/03, "Drooling over Heinz?"). Shares shed a dividend-adjusted 11.6% from the day before William Johnson became Heinz CEO on Apr. 30, 1998, through Feb. 6. The S&P 500 added 15.6% over the same period. Peer ConAgra Foods (CAG ) held steady, though Campbell Soup (CPB ) tumbled 25%.

In other words, the recent rise in Heinz's share price came alongside the company's showdown with the billionaire investor. Peltz's Trian hedge fund has pressured the company into reducing overall spending while shifting more cash to promoting core brands. On Aug. 16, Trian said it had likely secured some seats on the Heinz board (see, 8/17/06, "Peltz Pours It On at Heinz"). The final results won't be available until Sept. 15.

Some analysts say Peltz's plans won't ultimately improve the ketchup maker's fortunes. On Sept. 6, Sturdivant & Co. analyst Beth Ann Loewy downgraded the stock from market perform to market underperform. "Fundamental improvement is still somewhat elusive," Loewy says.

Others are more optimistic. Bear Stearns (BSC) analyst Terry Bivens has an outperform recommendation on Heinz. "A Peltz team presence could, in our opinion, promote continued earnings expansion," Bivens said in an Aug. 31 report.

Heinz spokesman Michael Mullen says Johnson's place as CEO is secure. "Johnson is supported by both the board and Heinz shareholders as the company implements its plan to enhance shareholder value," Mullen said in a statement.

5. Arun Sarin, Vodafone
Vodafone (VOD) CEO Arun Sarin recently emerged from a shareholder battle of his own. Shares of the company have gained a dividend-adjusted 17% since a day before Sarin took over at the Newbury (Britain)-based wireless giant on July 30, 2003. Still, Vodafone's share price of $21.46 at the close Sept. 6 remains well below its peaks near $60 in early 2000.

A boardroom showdown in the first half of the year led to the departure of five directors and former CEO Christopher Gent's resignation as "President for Life" (see, 6/6/06, "Vodafone: What Went Wrong"). Profit warnings have become the norm, and the company has pulled out of Sweden and Japan amid heady competition. The share price is flat for the year.

The company's foothold in the U.S. market remains an issue. In 2004, Vodafone bid unsuccessfully to buy AT&T Wireless. Meanwhile, some large shareholders have called on Vodafone to sell its 45% stake in Verizon Wireless, a joint venture with Verizon (VZ ).

Strong regional competitors and industrywide challenges may continue to put Vodafone's earnings on hold, some analysts say. "We remain unconvinced about the company having a competitive advantage based on its scale," S&P analyst Subhajit Gupta said in an Aug. 17 note. Gupta has a hold recommendation on the stock.

Nevertheless, Sarin may have weathered the worst of the shareholders' challenges. At the company's July 25 annual meeting, about 85% of those polled voted to re-elect Sarin as a director. "Yes, there was a minority agitating," says Ben Padovan, a Vodafone spokesman. "But the actual result when it came to people actually voting gave a very clear indication that the vast majority of our shareholders support him."

On Sept. 5, Vodafone tapped Italian media executive Vittorio Colao as chief executive of its European operations following Bill Morrow's departure. Colao was the head of Vodafone Italy from 2002 to 2004. Sarin's latest move has met generally positive reactions from analysts, though it could also signal the arrival of an heir apparent.

The head man is always the most visible target for frustrated shareholders. Of course, some sustained stock outperformance in the months ahead could quiet speculation about the tenure of Sarin—or any of the other CEOs mentioned here—in short order.

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