“A fish rots from the head down.”
This oft-repeated idiom is typically used to shine a light on executive failure. According to piscine biology, an actual fish starts to rot from its guts. This is worth reflecting on as we look at two companies today that have recently undergone significant changes in leadership.
CEO shake-ups have historically led to success for major companies. Take, for example, the hiring of turnaround specialist John Chen at Blackberry. Blackberry has managed to transition from a declining hardware giant to a successful software company with a footprint in sectors with huge growth potential.
Will changes in leadership translate to success for these two companies?
Aphria (TSX:APHA)(NYSE:APHA)
Aphria stock has climbed 12.1% in 2019 as of close on January 16. Shares are still down 52.9% over the past three months. Late last week Aphria revealed that co-founder Vic Neufeld would step down as CEO. Newly appointed chairman Irwin Simon and President Jakob Ripshtein will transition into the executive leadership team.
Aphria had come under fire since a short-seller made damning allegations back in December. The short-seller, Quintessential Capital Management, said that the changes vindicated its short thesis. Neufeld denied that his departure was connected to the short report. Aphria’s share price responded well to the news.
Aphria was the target of a $2.8 billion hostile takeover bid by Green Growth Brands. The bid raised questions about the connections between the two companies. This was also seized upon by Quintessential Capital Management. Aphria had also come under scrutiny in the press after its acquisition of Nuuvera in early 2018.
The short report and shareholder controversies aside, Aphria is well positioned to reach new milestones in 2019. Aphria expects to produce 255,000 kilograms of cannabis annually by the end of 2019 as it ramps up production and brings new facilities online. It has secured supply agreements with every province and territory in Canada. A recent BNN Bloomberg report also revealed that Quintessential’s short report may have understated its Caribbean holdings.
Hydro One (TSX: H)
Hydro One stock has been mostly static in 2019 so far. However, shares have climbed 4.7% over the past three months — a positive development given that Hydro One lost out on its Avista Corp. acquisition in early December.
Former Hydro One CEO Mayo Schmidt and the board of directors were forced to step aside in July 2018. Ontario premier Doug Ford had promised to remove Hydro One’s leadership over the course of his election campaign. The stock had only recovered from the news with the announcement that it lost out on Avista.
Schmidt’s team had laid out an aggressive strategy for growing Hydro One going forward. The team had also largely been successful in keeping rates down amid challenging environment. The Ontario Energy Board has been consistently hostile in its ruling against Hydro One. Leadership has attempted to resurrect the Avista deal, but in early January, Washington State regulators denied a request from Hydro One and Avista to reconsider the rejection of the merger.
In the near term, it appears Hydro One will need to look to domestic opportunities, but this might not be all bad. The company is flush with cash and enjoys a wide economic moat due to its Ontario monopoly. Hydro One is an attractive target for income investors, but it will struggle to solidify a strategic direction as long as the tug-of-war with the Government of Ontario continues.
