‘Mid-size IT firms outperform after CEO change more often than large firms’

Foreign brokerage Jefferies said in a report that CEO changes usually do not lead to a turnaround among large IT companies that have previously lagged behind and IT stocks outperform over longer periods if they improve across multiple metrics.

Hence the expectation of TCS/TechM outperforming revenue/PAT growth due to a leadership change could be optimistic.

She added, “Our analysis of 13 CEO changes over the past decade shows that mid-size IT companies outperform growth/profitability after a CEO change more than large IT companies.”

The change of CEO resulted in outperformance in revenue growth on seven out of 13 occasions, in respect of revenue and earnings growth on five out of 13 occasions and in revenue, earnings and return on assets/return on equity on three out of 13 occasions.

We also note that on nine occasions, CEO changes led to improvement in two of the three parameters and on seven of those nine occasions, IT stocks outperformed Nifty IT by more than 2 percent CAGR. Of the four occasions where it led CEO changes to improvements in less than two benchmarks, stocks underperformed on three occasions.”

Mid-sized IT companies benefit from changing CEOs. Among large IT companies, a CEO change has outperformed in revenue growth on three out of seven occasions, in revenue and profit growth on one out of seven occasions. The report said that no large IT company has seen outperformance across all three industry-related benchmarks.

However, among mid-size IT companies, CEO changes outperformed revenue growth on four out of six occasions, revenue and profit growth on four out of six occasions, and outperformed all three criteria on three of the six occasions. .

Hence, mid-sized IT companies have a higher probability of outperforming after a change of leadership versus larger IT companies.

The report said that turning away from IT companies is difficult – especially for larger companies.

“We define a turnaround as a situation in which an IT company that has lagged behind the industry in both revenue and PAT growth before changing CEO begins to outpace both revenue/PAT growth after changing CEO.”

Of the 13 CEO changes, six were potential turnovers, divided equally between large and medium-sized IT companies. Of the six cases, transformation occurred on only two occasions, indicating the difficulty in achieving transformation in IT companies. Moreover, both cases were successful turnarounds among mid-sized IT companies rather than among large IT companies, the report said.

(Sanjeev Sharma can be reached at [email protected])

– Jans

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