Home Depot's Surprising Choice for CEO

Wall Street isn't convinced that new CEO Frank Blake has the job for the long haul. But his skills may surprise his detractors

When Frank Blake was named to the top job at Home Depot (HD) on Jan. 3, as Chief Executive Officer Robert Nardelli resigned, the immediate reaction from many on Wall Street was disbelief. They scoured the company's announcement for "interim" or "temporary," convinced that Blake is simply a caretaker while the real replacement for Nardelli was being recruited. Home Depot, however, stressed that Blake is indeed the board of directors' choice as the long-term replacement for Nardelli. "Blake is the CEO, period," says Jerry Shields, senior public relations manager at Home Depot.

That's clarity that Wall Street could live without. Investors' reservations are numerous: Blake is a lawyer by training, he's never had the top job at a company, and he has little retail experience. While many investors and analysts think that Home Depot needs a steady, experienced chief at the helm these days, Blake's profile bears a strong resemblance to Nardelli's. He's a former General Electric (GE) executive with strong strategic skills but limited retail experience. "This is the second-largest retailer in the nation, and [Blake] has never run a company, or one of Home Depot's major operating businesses. As a result, further changes are possible at Home Depot," says a skeptical Matthew Fassler, an analyst at Goldman Sachs (GS).

Home Depot's shares did rise on the news, although most experts interpreted that as investor relief that Nardelli was leaving, rather than as a vote of confidence in Blake (see BusinessWeek.com, 1/3/07, "How Nardelli Finally Helped the Stock"). Home Depot's shares gained 2.3% on Jan. 3, to $41.07. The shares had fallen 22% (before dividends) during Nardelli's six-year tenure, while rival Lowe's (LOW) soared 172% in the same period.

Is Blake Prepared?

Blake's background is similar to his predecessor's in several ways. Like Nardelli, Blake worked at the GE Power Systems division—Nardelli as CEO and Blake as general counsel. He also has had very little experience in the retail business, which has some experts wondering whether he'll have some of the same struggles as Nardelli. "Retail is not just about getting the right product on the shelves at the right price, but you have to have that merchandising touch and sensitivity to serving what customers want," says Wendy Liebmann, president at New York retail consultant WSL Strategic Retail. "That's something you gain only with experience, and running a major retail corporation is going to be hugely complex." Liebmann points to the problems of another GE alum, Larry Johnston, who as CEO of grocer Albertsons struggled for returns and finally sold the company to Supervalu (SVU).

But people who have worked with Blake say he may very well surprise his detractors. Even though Blake hasn't been CEO of a company, many of his previous jobs were in leadership roles. He was general counsel for the Environmental Protection Agency and, as deputy secretary for the Dept. of Energy, he is said to have managed a budget of $19 billion. At GE, he made the unusual leap from the general counsel's office into a purely business role and secured a top executive's job of heading corporate business development at the conglomerate.

His job there was to lead business development efforts, including worldwide mergers and acquisitions.

"Blake has enormous vision and intellect and ability to see where the markets are going—clearly the Home Depot board saw much of the same things in him that Jack Welch did when he made him head of business development at GE," says Benjamin W. Heineman Jr., the former general counsel at GE, who has earned the reputation of grooming CEOs.

Improving Morale

Blake is the second corporate counsel from Heineman's ranks who has become CEO, the first being Jeffrey Kindler of Pfizer (PFE). Heineman is now a senior counsel with the law firm Wilmer Cutler Pickering Hale and Dorr and also a senior fellow at Harvard University's Kennedy School of Government.

Blake is also very different from Nardelli in one key way. While Nardelli could be harsh and abrasive, his successor has a milder, more collaborative nature. That could be an important difference at a company where morale has been a significant problem. "Blake has plenty going for him," says Noel Tichy, professor at the University of Michigan Business School and a leadership guru.

Experience aside, Blake will have substantial challenges facing him as he takes on the reins of the company. One of the key tasks will be perking up sagging morale at the company. Home Depot's customer service left much to be desired after a "culture of fear" instilled during Nardelli's reign. Staff at many stores were replaced when they underperformed set targets, and over 90% of the company's top executives turned over in the last six years. But what aggravated people the most was that these harsh actions were taken while Nardelli himself had a guaranteed bonus and a huge compensation package, $38.1 million for the year ended Jan. 30, 2006.

Possible Deals

Indeed, Nardelli also received $210 million as he departed the company. Beyond morale, Home Depot is being squeezed by the current housing slump, which has weighed heavily on the home-improvement company. "[Home Depot]'s fundamental issues include a deteriorating housing market, store saturation, and eroding market share," says Mark Rowen, analyst at Prudential Equity, who has an underweight on the stock (see BusinessWeek.com, 11/22/06, "Customer Service Is Back in Style").

There are some who believe that Home Depot's board of directors made exactly the right choice in naming Blake—but not because of his potential as chief executive. Just a month ago, there was speculation that private equity firms such as Texas Pacific Group had approached the Atlanta retailer about taking the company private in a deal that would approach $100 billion (see BusinessWeek.com, 12/1/06, "Home Depot: A Big Orange Buyout?"). Some analysts believe such a deal is still a possibility. As a result, the thinking goes, it may not make sense for Home Depot's board to try to recruit a top retail expert who may have to be replaced only months later. Far-fetched? Perhaps, but the scenario seems possible to some. "We believe that the change in leadership will renew potential takeover speculation," says Mike Baker, analyst at Deutsche Bank (DB) (see BusinessWeek.com, 11/15/06, "Housing and Home Depot: Unhappy Together").

Of course, a buyout, particularly one that would be the largest ever in the history of finance, is no sure thing, even if it is being discussed. By giving Blake the chief executive job, Home Depot's board has the company's future—and their own—riding on his leadership. "The board is taking an athlete and sending him to the Olympics," says Michigan professor Tichy. "It's a risk, but he's always shown outstanding leadership in the past."

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