The Hurvitz legacy - TheStreet

How to measure CEOs

There are those who say share price is the indicator; the share should reflect all the company¿s economic parameters and express the real value the CEO created for shareholders.

But share price is subject to market fluctuations, and events of the past two years have taught us that stocks can lie ¿ and for no short time too.

There are those who say net profit is the end all and be all ¿ as opposed to share price, it reflects the real value the company creates. But in the past two years we have learned that accounting principles sometimes allow the posting of "profits" that are not profits at all.

The strictest say then that cash flow is the ultimate indicator: CEOs are measured by the company's ability to create real money ¿ the kind that piles up in the bank, not just accounting "profits" that are sometimes far from the cash the company makes.

Maybe, but even here there were no small number of surprises recently: we've seen companies whose cash flow wasn't free and clear but entirely and methodically mortgaged to new investments, and we've seen companies with strong cash flow and no long term strategy.

Therefore many do not make do with share price, profits or cash flow or any other quantitative statistic and would say the best way to measure a CEO is in the legacy he leaves behind at retirement.

Ex-Teva CEO Eli Hurvitz met all the quantitative criteria that can be dreamt up for a CEO: Teva's share price and net profits rose thousands of percentage points during his tenure.

Even more impressively, in the past three years when the company was already big in international terms, it continued to posted outstanding performance. Share price rose more than 200% and profits tripled.

However, Hurvitz's biggest test, that which will make him the most successful CEO in Israeli history to date, is the legacy he leaves behind, Israel Makov.

The changing of the guard at Teva, announced a year ago and carried out six months ago, filled many investors with dread. No wonder, after 33 years with Hurvitz as the company¿s dominant CEO leading Teva to great achievements, his shoes look very difficult to fill.

But the way the management changed over at Teva signaled how unlikely a crisis with the entry of the new CEO is.

Unlike at Bank Hapoalim or Cellcom, where changing, or trying to change, the CEO, were done amateurishly in the media ¿ at Teva the changing of the guard was well thought out. A year before his retirement, Eli Hurvitz named his successor, officially appointed exactly on the planned date. There were no dramatic board meetings, no leaks to the press, no names of candidates or embittered VPs threatening to resign.

Teva's business momentum didn't stop when Makov entered office; the company continues to radiate confidence, doesn't stop to absorb acquisitions and essentially hasn¿t even hiccupped ¿ just remained on track.

Teva's performance didn't look outstanding two and three years ago when all of Wall Street was on fire and every CEO was a star. Today, after the technology crash and the spread of the global recession, Teva is revealed as unusual.

One of the more sensitive issues at Teva, most of whose investors are U.S. institutional investors and whose share has been the currency of acquisitions in recent years ¿ is its relationship with the capital market and its ability to maintain a high share price.

Eli Hurvitz left CFO Dan Suesskind to Makov. Suesskind continues to rule the U.S. analyst community with an iron fist, artistically managing their expectations, careful to surprise them every quarter and to "educate" any of them or the press who dare to doubt his projections.

The most recent expression of this came a week ago when investment bank UBS Warburg, which lowered its "buy" recommendation two months ago, was forced to make a u-turn after the company's financials and resume its recommendation as "strong buy".

Are skies blue?

Far from it: Teva's recent leap forward made it into a real aggravation for the big drug companies. Competition in every arena will increase, and the rivals will be bigger and stronger than ever.

The capital market is more cautious than ever today about companies like Teva, that make frequent acquisitions, after a long series of such companies handing investors nasty surprises.

Analysts will delve deeper and deeper into Teva¿s ability to create free cash flow, and not just increase sales and profits. It is no coincidence that the company¿s press release for Q1 of the year noted its $103 million cash flow in comparison with its $273 million cash flow for all of 2001. Teva understands that today cash is king in all sectors, even those considered "safe" until now.

Over the weekend, Merrill Lynch analyst Paul Wood house published another "buy" recommendation for Teva. Woodhouse believes last week's ruling in a U.S. court on Augmentin could increase Teva's profits by $100 million next year.

Woodhouse, as analysts will, may exaggerate: Teva's $8.5 billion market cap looks rather pricey, and skepticism is called for now on all financial markets. However, where Teva is in question, care is necessary: Teva has beaten the skeptics time and time again in the past decade.