Emergency Room Execs

Wall Street should be suspicious when a troubled company hires a new CEO.

Investors in Tyco International, the struggling conglomerate, got a dose of good news Thursday night. Ed Breen, the well-regarded president of cellular phone giant Motorola, agreed to take the CEO job, which had been vacant since former CEO Dennis Kozlowski resigned two months ago, just as he was indicted for sales tax evasion.

Tyco’s stock rose more than 40 percent by Friday afternoon, adding nearly $7 billion in market capitalization. Analysts predictably greeted the move with a round of huzzahs. “The job acceptance by a high profile and sought-after executive reaffirms our view that Tyco has excellent assets, fixable problems and great stock potential,” gushed Don McDougall of J.P. Morgan.

In recent weeks, Tyco has been rudderless—just hours before naming Breen, it denied rumors that it had retained bankruptcy advisers. But Breen has the typical attributes of the breed of CEOs called in to clean up broken companies. He’s a former college wrestler (read: tough) who worked his way up to CEO at General Instruments (read: persistent), which Motorola acquired in 2000. He’s married to his college sweetheart (read: he didn’t ditch his first wife when he got rich, like Kozlowski did). And he was known to mingle with employees in Motorola’s company cafeteria, something the yacht-owning Kozlowski surely never did.

Such tough-guy rescues almost always cheer investors, especially at companies where the previous boss left under a cloud. After all, they reason, if a respected executive like Breen is willing leave a blue-chip like Motorola for Tyco, perhaps the company’s situation isn’t as dire as the press makes it out to be. The new executives are usually operators rather than empire builders. Unwedded to the poor decisions of the ancien régime, they can slash jobs, discontinue operations, and even take big charges and restate earnings, as this earlier “Moneybox” described.

But there are plenty of reasons not to buy shares when a well-mannered, middle-aged manufacturing executive has taken the reins of a busted company. The recent history of paramedic CEOs is not impressive.

Investors were similarly thrilled in June 2000 when former General Electric executive Gary Wendt took the reins of the large insurer Conseco, which was nearly undone by the greed of its top executives and directors. Wendt had been the longtime head of GE Capital, the financing unit that provided a huge chunk of GE’s earnings. Here was a graduate of the Jack Welch school of management come to impose order on a rogue company. Analysts barely blinked when Wendt was awarded a $45 million (!) cash signing bonus. The stock more than tripled in his first six months in office, rising as high as 20 in early 2001. But Wendt lacked the power to bring good things to Conseco. The financial mess he inherited—a morass of debt and bad loans—exceeded his considerable skills. And Wendt made matters worse by consistently overpromising and underdelivering. Conseco’s stock earlier this week plunged below $1.

When Robert Lutz was appointed CEO of Exide, the large battery maker, in November, 1998, the stock rose 15 percent on the news. Lutz, a Marine with an impeccable reputation for integrity, had been the vice chairman and president of Chrysler and was regarded as the heroic architect of its ‘90s resurgence. Exide was laden with debt, under investigation by several states for allegedly selling used batteries as new, and soon faced allegations that company officials had bribed a Sears buyer to sell substandard Exide batteries. Lutz stopped doing business with Sears, one of the company’s largest customers, and engineered a series of acquisitions and moves that didn’t pan out. Last August, with the stock falling, he left to join General Motors as head of product development. Earlier this year, in April, Exide filed for Chapter 11.

Clear-headed, successful executives may find their judgment clouded when offered the top post at a troubled company. The first reason for this is second-fiddle syndrome. Despite his considerable résumé, there was no way Ed Breen would be CEO at Motorola anytime soon. Chris Galvin, the third generation of Galvins to hold the top job, is ensconced snugly. Gary Wendt and Robert Lutz had dead-ended at their longtime employers. With apologies to Mel Brooks, “It’s good to be the king.” CEOs still have a kingly status on their corporate campuses that mere presidents, chief operating officers, and vice chairmen envy.

The second reason is money. The Wall Street Journal reported today that Breen would receive a $1.5 million salary from Tyco, a signing bonus, and options on 2 million shares. At Motorola, his salary was only half that amount. And the 1 million options on Motorola shares he received in 2001 are all underwater.

Finally, parachuting into troubled companies offers executives the chance to execute the greatest coup in business: the turnaround. Taking a broken-down jalopy and transforming it into a high-performance machine is the ultimate test of managerial skill. Pull it off, and you gain induction into the CEO Hall of Fame. Many of history’s most highly regarded bosses— Alfred Sloan at General Motors, Lee Iacocca of Chrysler, Gordon Bethune of Continental, Louis Gerstner at IBM—gained their status by virtue of engineering turnarounds. And given the stubborn persistence of the options culture, the financial rewards for pulling one off can be massive.

Tyco may yet turn out to be one of those great turnaround stories. And Ed Breen may bring rectitude, competence, and confidence to a company sorely lacking in all three. But when a company has been shattered, that may not be enough to save it. It also may not be enough to merit the traditional Wall Street bounce.