For better or worse, shareholders invest in people
General Electric's recent CEO swap proves the top dog's influence on stock prices
When you invest in a company, you are supporting that firm’s leadership. So, it should come as no surprise that a change in the CEO position can often influence a company’s stock price. Sometimes fresh blood is welcomed by investors, serving as a catalyst for a much higher stock price down the road. Other times, depending on who takes over, a new CEO can sow uncertainty in investors and provide a reason to sell.
As proof, let’s take a look at two recent examples of prominent CEO departures at a few of the largest companies in the world, General Electric and Microsoft.
As most people know, Microsoft was one of the fastest growing technology companies in the 1980s and 1990s, but the company hit a wall in the spring of 2000 and lost its elite status during the three-year dotcom sell-off. During that period, Steve Ballmer took over as the new CEO of Microsoft when co-Founder Bill Gates stepped back from running the company to focus on development of new products.
Microsoft stock was then trading at $35 a share. Nearly 14 years later, when Ballmer left in early 2014, the stock was only $41 a share. The most infamous example of Ballmer’s inept leadership was his purchase of Nokia’s phone business in September 2013, only right before he left the company. This was a monumental mistake to get into the low margin phone business in direct competition with Apple and its phenomenally popular and successful iPhone. It turned out to be a $ 7.6 billion dollar write off, which was almost the exact purchase price, only a year and a half later, in April of 2015.
Once Satya Nadella took over as the new CEO, investors’ interest was reborn in the stock, and now the stock is trading at $73 a share - an increase of 78 percent. Nadella has taken Microsoft in a different direction with targeted focus on cloud computing. As a result, investors have embraced this new strategy by buying the stock.
The exact opposite happened with another well-known company, General Electric.
In June, Jeff Immelt announced he was stepping down as GE’s chief executive after a 16-year tenure, and similar to Microsoft’s Balmer, under Immelt’s leadership GE stock underperformed the S&P 500 index. The stock is actually down more than 30 percent since he took over in 2001. The new CEO, John Flannery, is a 30-year veteran of GE, having worked in numerous divisions throughout his tenure. He was head of corporate development from 2013 until he became the new CEO. Flannery was involved in the sale of NBC to Comcast, GE appliances to Electrolux, the purchase of Alstom Power, and the acquisition of Baker Hughes in the energy area.
Unfortunately, Flannery isn’t off to a very good start either. GE’s stock is down 15 percent since the executive change was announced. So far investors are not impressed because Flannery hasn’t announced any major moves or new initiatives, and the stock price has been steadily dropping as a result. The most telling form of disapproval was from investor Warren Buffet who, according to regulatory filings, sold his entire 10.6 million share position in June right after the CEO change was announced.
Change in leadership does matter to the stock price; just be careful who you bet on, because it can go either way.
In Microsoft’s case, the board selected a young CEO (only 47 years old) who led the company’s move to cloud computing at time when the technology was gaining momentum. GE’s board chose a safer route by picking a 30-year veteran, who most likely is entrenched in the previous way of doing things that he isn’t likely to change the course of his failed predecessor. So far, Microsoft shareholders are a much happier bunch.