How will appointment of new CEOs affect investors?
Last week saw the arrival of two new CEOs at FTSE 100 (UKX) companies. Just what can investors in Astrazeneca (LSE: AZN) and Barclays (LSE: BARC) expect with new bosses at the helm?
Astra has appointed an outsider in Pascal Soriot, who takes over from interim CEO Simon Lowth in October. Mr Lowth will return to being finance director.
In contrast, Barclays has chosen an insider, Antony Jenkins, the former boss of retail and commercial banking, to take over as CEO. But it also has a new chairman in the form of Sir David Walker, who assumes the role in November. And with Antony Jenkins stepping up from what has been the Cinderella side of Barclays' business, in reality there are two new brooms at Barclays.
Both management teams face considerable challenges. Astra is facing its well-known patent cliff. About half of its current revenue stream will expire by 2016 when several drugs lose their patent protection.
There are three, or possibly four, courses of action it can take. It can strive to develop new patented drugs through R&D, a strategy that it has pursued with singular and unfortunate lack of success so far. It can buy new drug formulae through M&A. It can diversify into generic drugs or consumer health, like rival GlaxoSmithKline (LSE: GSK). Or possibly it could run itself as a cash cow and eventually find a buyer.
Pascal Soriot's appointment suggests the company will persevere with the R&D route. He was formerly chief operating officer of Roche (OTC: RHHBY.PK), the R&D-led drugs and diagnostics company. Before that, he was CEO of US biologicals business Genentech, which he merged into Roche, having trained as a vet before moving into the pharmaceuticals industry.
Announcing the appointment, chairman Leif Johansson told the Financial Times that he expected no dramatic change from the current strategy, though with a greater open-mindedness to partnerships with other organisations.
That's in contrast to the strategy we might have seen from Simon Lowth if he had been confirmed in post. In his short tenure, he secured a deal with Bristol-Myers Squibb (NYSE: BMY.US) to jointly acquire biotech company Amylin. It seemed to point to an innovative M&A strategy that might have presaged a quick change in Astra's fortunes.
Instead, investors will need to be patient while they see if Mr Soriot can get more out of Astra's R&D department than his predecessor.
Patience is a virtue that Barclays' investors will also be in need of. The new team's agenda is to cut Barclays' investment banking division down to size and restore the bank's tattered reputation. David Walker has been vocal over his desire to cut remuneration in the investment bank, which is tantamount to the same thing.
That's all well and good. In the long run it should make Barclays a better, safer, more utility-like bank. Mr Jenkins has said that it will take three to five years to turn it around, and has promised to present a transformation plan by the first quarter of next year.
But it's all about cutting income, not about growth. Investment banking contributes over 60% of Barclays' pre-tax profit. There is no short-term fix to replace that income stream. Indeed, Mr Jenkins has scrapped his predecessor's 15% RoE target in favour of something just north of Barclays' 11.5% cost of capital. It may seem academic when last year's actual RoE was just 7%, but a target to not actually destroy capital is modest.
In the meantime there is considerable execution risk. Mr Jenkins has virtually no investment banking experience. David Walker has held senior positions at Morgan Stanley, but can hardly claim to have got his hands dirty in the trading pit. The investment bank is run by Rich Ricci, a former close lieutenant of Bob Diamond. It remains to be seen how safely the top two can cut the investment bank down to size.
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> Tony owns shares in AstraZeneca and GlaxoSmithKline but no other shares mentioned in this article.