Faculties and research

Articles from Cass Knowledge
Finance

Hello and good buy

With an ever-narrowing window of opportunity to make their mark, chief executives often make a major acquisition or disposal in their first 12 months, writes Nick Mathiason.

It was a year few at Nissan will ever forget. In 2001, Carlos Ghosn, now probably the world's most respected figure in the motor industry, became Chief Executive of the Japanese car firm. Ghosn inherited what can politely be described as a basket case. Struggling under the weight of $19 billion (£13.1 billion) of debt, Nissan was haemorrhaging market share in all its key sales areas. That was until Ghosn rolled up his sleeves. Audaciously, the Brazilian-born son of Lebanese parents promised investors he would resign in 12 months if he could not make the firm profitable. Furthermore, Ghosn promised, by 2005 - four years into his term of office - Nissan's debt pile would vanish amid surging profits. Ghosn's self-imposed targets gave him the incentive to move fast. He immediately unleashed an aggressive cost cutting strategy, shutting five factories in Japan and selling off several subsidiaries including the firm's aerospace division. The strategy put Ghosn's life at risk. To Japan's business and political establishment, his axe-wielding divestment strategy made him public enemy number one. The multi-lingual French citizen had to travel with a bodyguard after receiving menacing hate-mail.

The samurai of cars
But Ghosn, now also Chairman and Chief Executive of Renault, delivered, and soon he was basking in wide-ranging acclaim. A year into his tenure, Nissan turned a $6.1 billion loss into a $2.7 billion profit. Now feted in Japan, he is known as the "samurai" of the car industry and even has a cartoon series in his honour. Ghosn is one of the best examples of how chief executives use their first year in charge to make significant acquisitions or disposals at breakneck speed that shape their tenure - or at least stamp their authority on a business. Perhaps it should not be a surprise. As with a new president or prime minister, the first days, weeks and months in charge often define an administration. And a head honcho's stock is usually never higher than at the beginning of a reign. After all, the candidate's agenda has clearly won favour with the board of directors who made the selection. In other words, a new chief executive has a pristine mandate to take decisive action. What's more, as chief executives' length of tenure diminishes, due in part to increasing expectations from investors, analysts and the media, the window for a big takeover or disposal is narrow - a question of "act now for tomorrow you die". But whether the best decisions are made under that maxim is questionable. With business leaders under more pressure than ever to make their mark in a harsh economic climate, Cass Business School's Mergers and Acquisitions Research Centre (MARC) has just published a detailed study focusing on chief-executive succession, deals and company performance. Sifting through companies in the FTSE 100, the French CAC 40, the German DAX 30 and the Spanish IBEX 35, MARC, led by Scott Moeller - the former Deutsche Bank and Morgan Stanley senior executive and now Honorary Visiting Professor in the Cass Faculty of Finance, focused on companies that changed their leader in the 11 years to June 2009.

Limited time to make impact
The survey is a fascinating insight into corporate behaviour. It shows that chief executives of Spanish quoted companies are more likely to be appointed as a result of a forced succession than their UK, French or German counterparts. And they are quicker to make a significant acquisition, too. But FTSE 100 bosses, 137 of whom assumed power in that 11-year period - proportionately the highest figure at any leading European bourse - are quicker to make a major disposal. The average time it takes a new FTSE 100 boss to make a sale is a fraction under 12 months - more than twice as quickly as other chief executives in the study. However, there are perhaps more important lessons to be learnt from the study. It suggests that chief executives who go for a major deal in their first year outperform their peers in the long run. But doing more than one deal in the first 12 months lowers a firm's returns. And chief executives who complete a significant disposal in their first year outperform those who make an acquisition. "If you are an investor in a company which has just appointed a new chief executive, you should get ready for an acquisition or divestiture," said Scott Moeller. "A new chief executive is, in this sense, a leading indicator of significant corporate activity. "This is because a CEO's time in office has diminished. As Robert Kelly, Chairman and Chief Executive of BNY Mellon said earlier this year at a lecture at Cass, the average tenure of a chief executive in the US has recently declined from six years to four and a half. They know that they are not going to be around forever. They have a limited amount of time to make an impact. A small acquisition might not do it. If you want to leave your mark on an industry, if you want to change the landscape, you have to do it quickly."

Questions over Pru prudence
It is a comment that goes to the heart of business behaviour and perhaps partly explains the rationale behind one of the biggest corporate merger and acquisition stories since the financial crisis: the aborted £23.2 billion pursuit by the Prudential of AIA, the Asian assets of AIG, the beleaguered American insurer. The Prudential's Chief Executive, Tidjane Thiam, was appointed only in September 2008. Exactly 12 months later he began what proved to be a hugely controversial bid for AIA that split shareholders down the middle who insisted the company was overpaying for AIA, were aghast at the prospect of a £14 billion rights issue as well as the possible sale of the Prudential's UK assets to fund the deal. Thiam - multilingual, razor sharp, urbane and self-deprecating - was enthusiastic about Asia's opportunities for the Pru. Now, the former Minister of Planning and Development for the Ivory Coast has put his firm's reputation on the line and at the time of going to press, quite possibly ended his career at the Pru. In Britain, where chief executives change with increasing regularity, there are a number of recent incumbents with serious challenges. Among them is Marc Bolland, the man credited with reviving the Morrison supermarket chain who, in May, replaced Sir Stuart Rose as Chief Executive of Marks & Spencer. Rose came to Marks & Spencer during a takeover battle for the high street clothing and food giant. His job was to repel an £11 billion bid by the buccaneering tycoon Sir Philip Green, the owner of Arcadia. Under pressure to deliver a growth story for shareholders after years of diminishing returns, Rose had only weeks to change a tide that was set to deliver M&S - an icon of UK retailing - into the hands of Green. Rose developed a recovery plan that involved selling off M&S's financial services business to HSBC and buying control of the Per Una brand. Green withdrew his takeover bid after failing to get sufficient backing from shareholders. Rose won and subsequently enjoyed a period of growth and rising share price at M&S.

The blame game
Rose's first year as Chief Executive proved to be one of the most dramatic in recent British corporate history. It came to an end in May as M&S's performance deteriorated. Now Bolland, the dashing Dutch executive, has taken the reins. He does not have long to persuade shareholders that he is worth his £14.8 million salary package. Bolland is expected to take three months assessing options before outlining his strategy in the autumn. He may be wary of blaming his predecessor: Rose remains as M&S Chairman. The management writer Simon Caulkin said: "There are all too frequent occasions when a new chief engineers big writedowns within a specific division and blames the previous incumbent for the situation. This is a very common tactic and a fairly cynical way to improve baseline performance. This can lead to forced sales of divisions in a move that returns cash to shareholders but may not be in the long-term interests of the company itself. Getting all the bad news out early sets the context for corporate activity. "It's all about managing and creating expectations among shareholders rather than communicating with employees." Most evidence suggests that major acquisitions or mergers fail to deliver returns for investors. And yet Cass's study by its Mergers and Acquisitions Research Centre seems to suggest that sealing one acquisition in the first 12 months of a chief executive's tenure leads to stock market outperformance. "When you come in, you're going to think long and hard before launching a bid," said Anna Faelten, a senior researcher at MARC. "One reason M&As at this stage may stand a better chance of working is because they are doing the deal for the right reasons."

Nick Mathiason, formerly Business Correspondent at The Guardian, is a business development and media strategy consultant.

Share this article