Picking out a CEO to go in technology right now might seem pointless. The argument could be almost any of them if you count share price only. That is doubly true if you look at just DRAM and flash memory makers. But the one stand-out company which could use a new CEO is SanDisk Corp. (NASDAQ: SNDK). Dr. Eli Harari is a co-founder of the company, and he sits as Chairman, CEO, and as a member of the Special Option Committee.
Dr. Harari is far from inept at the job and is a leader in the memory industry. Specifically, we want to point out thatthis call is more of a role change rather than a change that would puthim out of the company entirely. Harari has also been CEO since thecompany’s inception in 1988.
The current climate cannot be blamed on any single CEO unless the CEOhas personally made some calculations that cost the companydearly. We also cannot blame a CEO merely for a share price wheneverything is down and when some are down even worse. But there aresome issues here which might more easily force a dual-role or a rolechange than would have been expected otherwise.
One strategy which backfired against the company was its expansionplans. Many managements fail to accurately predict the economy’s moves. They believe they will perform well even if everyone else is performing poorly. But the company waited far too long to slowdown production and to halt its plant expansion plans. Those issues rest on aCEO’s shoulders.
Another situation is the buyout offer from Samsung in Korea, althoughthis is a "he said she said" argument that the real answer is unknown.The buyout price was $26.00 per share. SanDisk said thecompany did not ever get back to them properly and that it hadquestions regarding the motives for the inquiry. Samsung just saidthat the company kept pointing to a higher price based merely upon the52-week highs. This has now come and gone, but shares are downliterally almost 75% from that price regardless of Samsung’s intent.Regardless of who was right here, there seemed to be very littlecommunication. That rests on a CEO’sshoulder.
This has also been a long-standing issue and one which depends uponwhere you stand on brand loyalty. SanDisk brought out the Sansa mediaplayer based upon how well the iPod was doing. Microsoft did the samewith the Zune. The problem is that if you go out looking for Sansausers at the gym, on a bike, or anywhere. Personally, I have never seenone and I have asked around and upon asking around it seems that veryfew people even know of these by comparison to the iPod or the Zune.That is a branding and strategy issue, which again rests on a CEO’sshoulders.
Sanjay Mehrotra is the co-founder and he serves as President and ChiefOperating Officer. So the thought that he would step in and replaceMr. Harari is not likely nor a good idea. SanDisk may also be in everyoutlet and distribution point it can get into in today’s economicclimate. Unless they have a superstar waiting in the wings, there is areal problem here: Who would be CEO? Also, where would they comefrom? There may not be any good answers today on any other candidates.
This stock was the superstar pure-play of its sector in flash memoryfor flash cards, memory sticks and others. But now analysts are notjust expecting wide losses for this year. They expect wide losses in2009 as well. Revenues are expected to decline again in 2009. SanDiskappears to have an extremely solid balance sheet and all of itsbook-value numbers look great. But if the company will only standalone and will use up its books to navigate through a time of losses,then the current books of today essentially do not matter.
With shares around $7.00 today, these are obviously way under the"possible" buyout of $26.00 from Samsung. The 52-week high is $39.63and this was well over a $60.00 price at the start of 2006. Again, wedo not use share price as a sole reason to go. It is just impossibleto not recognize the shareholder losses here.
Shareholder suits based solely upon price are going to have almost zeromerit to them. But the value put on the table could have been achievedand it is far higher than the stock price of today. Depending upon thecourt system in 2009, this could be an issue.
So how would we rate this ahead? We have said less than two months agothat it is surprising that there has not been a shareholder revolt. Wewould expect one if this continues. The consumer squeeze is going tomake things hinge perhaps solely on share price from here and we haveseen over and over how this company has shown explosive shareholdergains from these long sell-offs. The problem is that nothing pointsthat way right now unless the governments start offering memory andconsumer electronics stimulus packages.
SanDisk is not necessarily the cheapest source for flash, although it is perhaps the best and most widely distributed. That will put thecompany in the mix of the middle-tier benefactors for the new consumerclimate into 2009.
We would actually predict that there is less than a 33% chance thatHarari will leave entirely, but there is a decent chance that Hararicould stay on as chairman and bring in a strategist and action CEO asnew blood.
Jon C. Ogg
December 2, 2008