All Nardelli, All The Time

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While Gret-Gret more or less blew a gasket over Bob Nardelli's exit from Home Depot--she describes it as a "watershed," a "warning shot," a "defenestration," as an end to "arrogance"--slightly more sober reflection on the meaning of it all is going on across the interwebs.
Ted Frank at PointofLaw.com points out that when Nardelli took the Home Depot job, he had to leave behind millions of dollar GE stock options. What’s more, anyone who bought or held onto the stock after Nardelli was hired in 2000 knew or should have known about Nardelli’s severance package.

Economic theory teaches us that when a rare commodity with uncertain future value like an MVP shortstop or GE executive is subject to an auction, the winner of the auction will probably be the party that most overvalues the commodity: the concept of bidders' remorse. And perhaps Home Depot overpaid for the privilege of hiring Nardelli. (Press coverage is sneering that the Home Depot stock price dropped during Nardelli's reign, but, aside from omitting dividend payments, that drop reflects much more how bubbly Home Depot stock was in 2000, when it had a 46 P/E ratio. Nardelli doubled Home Depot profits; improved shareholder returns by repurchasing 10% of outstanding stock; quintupled dividends; increased the net profit margin; and the stock has been very profitable for those who bought it in late 2002.)
But, with a very few exceptions not relevant to this discussion, no one was forced to be a Home Depot shareholder. Someone could anticipate that large sums of shareholder money would eventually be paid to Nardelli on the back end when he was first hired. If one disapproved of the pay package Nardelli was destined to receive, there was a very easy solution: divest the stock, and invest in another company that did not bid on former GE executives to become their CEOs. (Of course, then one would have missed the huge profits in the run-up on Boeing stock.) Investors who think that GE experience created magical CEO abilities worth a premium in the marketplace were free to invest in Home Depot. Home Depot stock went up over 20% in December 2000, the month that Nardelli was hired: it would have been easy to sell the stock if one disapproved of the generous employment contract while the market basked in the glow of the hiring. No one paid Nardelli a dime who didn't agree in advance to pay him that dime.

Vitaliy Katsenelson writes on his Contrarian’s Edge blog that the likely lessons of Nardelli’s departure for CEOs won’t be Gret-Gret’s favored lessons.

The ousting of Bob Nardelli sent a wrong message to American CEOs: it taught them an incorrect lesson – manage the stock, not the company.
As Herb Greenberg mentioned in his column, if Home Depot’s (HD) stock went up while he was in charge he would still have a job, though he’d be $210 million poorer.
Bob Nardelli was a terrible stock promoter (not his job), but he did a terrific job managing the company (his job). As I mentioned in the past, from the time Nardelli took over Home Depot in 2000, Home Depot’s earnings have grown at an amazing clip of 20% a year, revenues over 15%, net margins have increased and return on capital went up every single year. The stock has not gone anywhere during his leadership because it was grossly overpriced in 2000.

And, of course, it is this reluctance to become a huckster for a company’s stock that has led many managers to decide that maybe they’d fair better as a private concern.
Nardelli's severance [PointofLaw.com]
Blame Home Depot’s Board, Not Nardelli [Contrarian's Edge]

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