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CEO Departures And EBITA Performance

Garrett Cook

After reporting financial results below expectations, the diversified electronics maker Koninklijke Philips NV (NYSE: PHG), announced Healthcare CEO Deborah DiSanzo has left the company.

The vacancy means CEO Frans van Houten with have to temporarily lead the healthcare business, as management installs a new structure following an inability to meet its clients demands.

In a release issued Tuesday, van Houten was quoted as saying "The performance in our Healthcare sector is disappointing, with second-quarter EBITA expected to be approximately EUR 220 million, while expected Group EBITA of approximately EUR 400 million in the second quarter is in line with current market expectations."

This is the second quarterly of weaker performance in EBITA compared with year-end 2013:
Koninklijke Philips NV, EBITA:

Other instances of CEOs departing recently may offer insight into what we can expect from the replacement of a departing executive on a firm’s share value.
In March, Reuters reported Fared Adib, an executive from Sprint (NYSE: S), was being tapped to join Japan's SoftBank in late 2013, forcing his resignation from Sprint in Q1 2014. Since then Sprint has remained range-bound, staying between $7.38 and $9.75.

As for similar EBITA metrics we can see the boost reported at the end of Q1 in Sprint under new leadership:
Sprint EBITA:

Target (NYSE: TGT) saw its CEO depart early in 2014 -- after the large-scale and unprecedented breach of their customer's systems, when some 40 million credit card numbers were stolen. Target itself has been suffering from stiff competition as the U.S. middle class' spending power was whittled away during the recession.

However; as bad a Q1 2014 looks compared with Q4 2013, the performance is still above what was reported back in December 2013, when the breach took place.

Target EBITA:

Then there is Lululemon Athletica (NASDAQ: LULU) and CEO Chip Wilson, who was forced to step down in December of 2013 after the company was served with lawsuits accusing the yoga pant maker of hiding defects in their yoga pant products and thus defrauding shareholders.

Lululemon had a slight rebound in its EBITA in the first quarter of the Lauren Potdevin era -- but damage to the company is evidenced in the strong EBITA performance in only two of the past six reported quarters.

Lululemon EBITA:

More than one way exists to measure the value of a CEO departure and their subsequent replacement. Although with the current departure of the Philips Healthcare CEO over performance highlighted by EBITA levels wouldn’t be a bad way to gauge the impact of a CEO’s departure by looking at the growth/decline in EBITA.

If we can tell anything from this basic exercise, it would be that culture and public perception have a greater impact on equity performance than the person running the company. Just look at the performance of the comparison firms YTD using data from Bloomberg:

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