Transfield vs CSL: A tale of two CEOs
Transfield Services chief Peter Goode is moving on after overseeing average returns in a brief tenure. If only more heed was given to Brian McNamee's CSL story then CEO churn at Transfield, and elsewhere, might not be so high.
Goode has had an unhappy time at Transfield and has presided over a share price that has essentially done nothing over the period, despite a significant shift in Transfield’s strategy towards more value-added services. He is leaving Transfield to take up a partnership with a private equity firm, Arle Capital Partners.
A significant factor in the investor discontent about Transfield’s performance has been Goode’s $575 million acquisition of the oil and gas drilling and services group Easternwell in 2010, which has contributed to a string of earnings downgrades. The market view was that, whatever the merits of the strategy, Transfield paid too much.
McNamee, who has made two company-reshaping acquisitions as well as a number of smaller deals during his 23 years as CSL’s chief executive said CSL tried to buy well when making acquisitions "because, of course, one of the big parts of TSR (total shareholder returns) is making sure your purchase price is as low as possible."
He said CSL bought assets at a time when they weren’t fully valued. Value, of course, is better understood by the market with hindsight – there was a period when the market wasn’t as enthusiastic about the ZLB acquisition as McNamee.
A classic case was the 2003 acquisition of Aventis Behring for an effective price of about $925 million. That acquisition, which included a massive discount on the book value of Aventis Behring’s inventories, was effectively self-funding. There was a massive gap between the value that the vendor, Aventis, saw in the business and CSL’s view of its value within its strategic framework.
McNamee, over the course of the 23 years, has produced the best TSR of any large-cap chief executive – an annualised 25.2 per cent. What’s even more interesting is that CSL’s out-performance of the market has increased the longer he has been in place, accelerating noticeably after the Aventis Behring acquisition, although the foundations for the stellar returns were laid in 2000 with the $1 billion acquisition of the Swiss-based ZLB plasma fractionation business.
That increasing TSR defies the norm for chief executives. Management consultants Booz Allen Hamilton have in the past analysed the relationship between chief executive tenure and corporate performance and found that the longer the tenure the better the performance.
That’s not a surprising conclusion given that a chief executive is only going to last a long time in the role if they are successful. The twist in the firm’s findings, however, is that regardless of the length of tenure the first half of a chief executive's tenure produces materially better outcomes than the second. McNamee, thanks to the diligence CSL has applied to its two big acquisitions, has defied the norm.
McNamee himself attributed CSL’s success to consistency of purpose and a clarity of direction, as well as the long-standing nature of the relationships and understandings between senior executives.
One of the issues created by chopping and changing chief executives is the inevitability that it will also lead to the chopping and changing of strategies, and people.
It is instructive that McNamee had been chief executive for about eight years before the ZLB acquisition began the process of globalising CSL. He said, however, that he knew from the outset that to be successful in the pharmaceutical industry the company had to operate in Europe and the US – there has been a consistent strategy underpinning CSL’s success, and a consistent core of senior people.
McNamee is, in more ways than one, an exception to CEO norms. Goode is closer to the normal experience of ever-decreasing longevity for chief executives within a market impatient for near-term results and intolerant of any perceived mistakes. The average chief executive tenure in this market is now less than four years, which doesn’t give them much time to develop and implement strategies let alone see the longer term effects on corporate performance and shareholder value.
While there have been some hiccups in its performance, Easternwell has made Transfield the biggest maintenance, modifications and operations service provider to the oil and gas sector, which may prove to be a sound growth strategy in the longer term – assuming the next chief executive doesn’t change the strategy.