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 / Summer 2006 / Issue 43(originally published by Booz & Company)


CEO Succession 2005: The Crest of the Wave

Which Way after M&A?
by Gerald Adolph

During the early years of this decade, merger activity declined along with the stock market. But now, with good reasons appearing for companies to use mergers and acquisition for growth, the number of merger-related CEO departures is again on the rise. (See “Mergers: Back to Happily Ever After,” by Gerald Adolph, s+b, Spring 2006.) One in six of this year’s departing CEOs lost his or her job after a merger or acquisition.

What becomes of these former CEOs? More than half (54 percent) move on, either to a new company, into consulting, or simply into retirement. The rest, however, stay with the acquirer. About half of these survivors take on an advisory role, serving on the board of directors or staying on as an internal consultant during the transition. But notably, the other half take a substantive operational role, typically either as the head of a division or in a key functional position with line management responsibilities. When WellPoint acquired the regional player WellChoice, for example, ex-WellChoice CEO Michael Stocker agreed to remain as CEO of the newly combined company’s Northeastern U.S. regional operation. Similarly, after United Technologies took over Kidde, former Kidde CEO Doug Vaday agreed to stay on as president of the fire safety division.

Why do so many former chiefs stay on? There are three reasons. First, being acquired by a larger company may be a passport to greater opportunity, even for executives who are losing their CEO title. Both Mr. Stocker and Mr. Vaday ended up running operations larger than the companies they had presided over before. Second, CEOs may stay with the acquiring company because there is a reasonable chance that they could move on to the chief executive role of the larger company in the future. For example, when News Corporation acquired Fox Entertainment, Fox CEO Peter Chernin took the role of president
and chief operating officer of News Corporation, which established him as a contender for the top spot. Third, when a deal takes an acquirer into a new business, that company will often insist that much-needed senior talent remain with the new entity. In this case, the CEO may agree, as part of the deal, to remain with the new company, particularly if his or her skill set and leadership are viewed as critical for success.

Gerald Adolph ([email protected]) is a senior vice president in Booz Allen Hamilton’s New York office, where he specializes in mergers, restructuring, and integration.

Strategies for the Newly Engaged Board

Corporate directors facing a departing CEO (whether the departure is planned or performance-related) have an array of choices. The results of the 2005 CEO Succession study suggest that some of these strategies will work better, on average at least, than others.

  1. If you promote an insider to CEO, performance may be good over the long term, but it will be relatively poor during the first five years.
  2. If you promote an insider to CEO and make the old CEO chairman, performance will suffer as the new CEO struggles for standing and autonomy.
  3. If you bring in an active CEO from another company (the “beggar thy neighbor” strategy), performance may or may not improve (it’s too new a strategy to tell), but you may be contributing to the decline of your national or regional economy.
  4. If you bring in an “old dog” (a former CEO) from either your own company or another, performance will improve during the first five years, but not as well as with the fifth strategy.
  5. If you bring in a first-time CEO from outside the company, performance will improve, but only in the first five years. Start immediately to groom a replacement (or plan a search for another outsider).

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  1. Rakesh Khurana and Katharina Pick, “The Social Nature of Boards,” Brooklyn Law Review, vol. 70, no. 4, Summer 2005: Unearths the relationship between board makeup and succession decisions.
  2. Chuck Lucier, Rob Schuyt, and Edward Tse, “CEO Succession 2004: The World’s Most Prominent Temp Workers,” s+b, Summer 2005: Last year’s study foreshadowed the “era of the short-term chief.” Click here.
  3. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
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