Verizon Surprises Wall Street With Newcomer CEO Pick

Verizon surprised Wall Street with the selection of former Ericsson CEO Hans Vestberg as its next leader, pointing to a future still focused on communications networks. While Verizon rival AT&T is seeking to build a media and entertainment empire, Verizon’s strategy looks likely to hew more closely to its roots as a dominant telecom player.

Lowell McAdam, Verizon’s current CEO, announced on Friday that Vestberg, who had joined the company only a year ago, would take over the top job on Aug. 1, seven years after McAdam himself got the role. The other main contender for the CEO job, executive vice president and 25-year company veteran John Stratton, is retiring, the company said.

Still, the shock hasn’t shaken up many investors so far. Verizon shares were trading at $49.56 at midday on Monday, 1% higher than the closing price on Thursday, before the CEO succession announcement.

Vestberg left Ericsson, where he had worked for 25 years, in July 2016 amid a sharp drop in revenue and profit margins at the telecom equipment maker. He joined Verizon last April as chief technology officer to help roll out the carrier’s new 5G wireless service and expand its fiber network. Stratton is president of global operations, a position that had him overseeing most of Verizon’s businesses, including wired and wireless telephone and internet services, as well as the enterprise unit catering to big companies.

The company’s board has long looked internally for leadership, so the Vestberg pick was “extremely surprisng,” Wells Fargo analyst Jennifer Fritzsche noted on Friday.

“When a company shifts from appointing an executive who has long overseen the recurring revenue aspect and 90%+ of its current revenue to one with more an equipment background it is very telling, in our view,” Fritzsche wrote. “We have long thought the Verizon’s fiber build and focus on IoT was more significant than the Street may fully appreciate. We see this announcement as further evidence of this.”

Some analysts said their level of surprise was heightened given Vestberg’s reputation at Ericsson, where he left amid a major slump in performance.

“Vestberg didn’t cover himself in glory at Ericsson,” analyst Jonathan Chaplin of New Street Research says. “I hope the board has good evidence to support choosing Vestberg over a known and respected leader like Stratton. I understand the allure of taking on someone from the outside during a challenging time in the evolution of the industry. Vestberg is a change–Stratton would have been a steady hand.”

Longtime telecom analyst Craig Moffett was also surprised, saying the move may telegraph an intention to avoid the media consolidation wave that already has drawn in AT&T, Time Warner (TWX, +0.85%), Disney (DIS, +0.37%), Fox (FOX, +0.91%), and other players. Verizon instead is doubling down on its communications and networking businesses, he said. Most on Wall Street expected the next CEO would be Stratton, who like McAdam and Ivan Seidenberg and Ray Smith before him, had a long history working his way up the ranks at Verizon and its predecessor telecom companies.

“The one clear take away is that this an endorsement of the ‘network first’ strategy that Verizon has long pursued,” Moffett said. “You cannot send a clearer signal than by choosing your CTO to be the next head of the company.”

Current Verizon (VZ, +0.22%) CEO McAdam should be credited with avoiding the need to make a splash with a huge merger, Moffett added. AT&T’s (T, +0.98%)$48.5 billion acquisition of satellite TV service DirecTV has been difficult, with customer cancellations accelerating, the analyst observed. “AT&T went off chasing rainbows with DirecTV and it hasn’t worked out too well,” Moffett said. “There must have been intense pressure on Lowell to follow suit. He deserves a lot of credit for resisting.”

Edward Jones analyst David Heger, who found the pick “somewhat” surprising, agreed that Vestberg’s selection “may also imply that Verizon’s board views a smooth implementation of 5G as being more important than making a large media acquisition, especially because Verizon prides itself on having the best wireless network in the U.S.”

The Vestberg pick made sense to CFRA Research analyst Angelo Zino. “Despite Mr. Vestberg’s short tenure thus far at Verizon, we believe the decision to make him the successor to McAdam makes sense given Vestberg likely has the best vision among executives ahead of a massive 5G inflection,” Zino wrote in a report on Friday. – Fortune