The CEO until last month was also the founder. He took this company from nothing to a $1.2bn company. It is hard to depart and it's hard to maybe affect the kind of change necessary when the company needs to put their shoulder to the wheel during hard times. This is a qualitative factor I hadn't really taken into account before, which is why I tend to shy away from a company like this. The Buffett's, Sequoia's, and Simpson's are just so much better at identifying the really good companies with a margin of safety than an amateur.
I identified BLUD as a good company, but I couldn't figure out the margin of safety. I'm not even positive it existed. A 30% premium is mostly a takeover premium and doesn't exactly reflect the idea that I missed some hidden value (this is just a gut feeling). I think noting that a founder/CEO with a decent inside ownership is not always a de facto sign that they are running the company really well, something to look out for with large cap tech as well. Obviously TPG sees room to better the operations and they aren't exactly paying a cheap price at 22x earnings. A new CEO can be a catalyst for public shareholders, although I'm reluctant to believe it's always a positive one.
The new CEO ran a company that was acquired. When I saw that Immucor had a new CEO, my interest was rekindled. A new CEO can mean tons of things. I saw that the new CEO was the former CEO of Mentor (the breast implant maker) that got acquired by JNJ a few years back. Could I interpret this as a sign that the CEO didn't have the typical CEO ego of wanting to not be his own boss? I could, but I don't have industry contacts or the scuttlebutt ability to figure out if that really was true. He did stay at Mentor for 2 years as a subsidiary company. I'm reluctant to read into this too much since it just confirms what I want to believe. It certainly meant that some change would occur at the company, although it's difficult to say it would be an acquisition without hindsight. Certainly the speed indicates that TPG probably was looking at the company before the CEO change, at least beyond preliminary stages. The CEO change probably gave them the courage to step forward with a bid. This is all back room kind of dealing though, which is not the basis of an investment process. It looks hard to do if you aren't a professional.
I can think of one good example of looking at a CEO change as a positive catalyst, although it clearly is based on a lot of research that is scuttlebutt. The hedge fund manager who had lunch with Warren Buffett after sending him stock research focused on a management change to make a profitable investment in Fiat (source):
"Sergio Marchionne, the new CEO, was a guy with a track record for creating value in Switzerland. He spent time in GE and made his mark at a Swiss quality control company. He came into a company [Fiat] whose reputation was tarnished and whose brand equity had been decimated. But philosophically smart people choose smart businesses. Marchionne saw the opportunity, and we saw Marchionne. We were likely the only investors outside Italy interested in Marchionne at the time. After some begging and pleading, he granted us a meeting. Marchionne joined Fiat with a mandate to do whatever was necessary to fix the company. We bought some shares. He confirmed what we surmised. He had full support of the board and its new chairman. If auto was worth more dead than alive, he'd kill it. Fiat was the biggest employer in Italy at the time. He took on the labor unions. He was fearless. He had real skin in the game and his incentives were aligned. Marchionne saved Fiat. He got $2.25 billion to cancel a legacy agreement that Fiat could "put" itself to GM. No one thought it could happen -- there's no way this debt-laden, cash strapped Italian company will win in an international court of law. But Marchionne walked away with $2.25 billion of cash and Rick Wagoner [then CEO of GM] was fired shortly thereafter. This was half of Fiat's market cap. We exited the position in the mid-teens and made a lot of money. It was the biggest profit generator in Brahman's history."
I can see how this process can work out well, but as you can see from the manager's explanation, it was based in part on meeting the guy. I'm unaware how an amateur investor could access the information pipeline to figure out what exactly Marchionne did at GE and the Swiss quality control company.
I'm not a fan of the anecdotal nuggets that get released in journalistic reporting, which is the one way I think an amateur could access this kind of information. I remember when Ken Lewis was touted as a great integrator who had a successful track record pre-CEO integrating some bank into BofA. Profiles of CEOs tend to be fairly glowing because no CEO would grant an interview to a journalist looking to expose how poorly they do their job.
Did I miss a quick 30% gain? Yes. Did I make a mistake? Maybe, but I'd lean closer to the no end of the spectrum. The acquisition angle is speculative, although BLUD had merit as an investment.
Does anyone have any other good or bad examples of a CEO change going unnoticed but being a catalyst to the up or downside? Ford comes to mind although there were serious survival issues when the company was trading at $2/share.
