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Cramer explains why CEO departures are not always bad for companies

  • "Mad Money" host Jim Cramer reviews the recent management turnover at Zimmer Biomet.
  • The recent departure of the medical device company's CEO actually turned out well for the stock, Cramer says.
  • Most cases of CEOs leaving their companies tend to disappoint shareholders, so Cramer looked into what went wrong at Zimmer that made them cheer the former CEO's departure.

While Jim Cramer likes cases where the best thing for a company is its CEO stepping down, they are few and far between and often quite bad for shareholders.

"But every now and then, investors will have such a low opinion of management that a CEO departure can actually send a stock soaring higher," the "Mad Money" host said. "Just look at what happened with an old favorite of mine, Zimmer Biomet, the big medical device company that specializes in orthopedic implants, just last week."

When David Dvorak, Zimmer Biomet's CEO, announced he would step down from his post with no permanent replacement in line, the medical device company's stock barely budged.

Since the news broke, shares of Zimmer have actually gone higher, suggesting that investors were optimistic about Dvorak's departure, Cramer said.

"To be really diplomatic about it, lately, Zimmer Biomet has been plagued by sub-optimal execution," the "Mad Money" host explained.

It began in 2014, when Zimmer Holdings announced it would merge with Biomet in a $13.4 billion deal that would create the world's second-largest orthopedic company.

Biomet helped broaden Zimmer's portfolio from hip and knee replacements to all kinds of orthopedic needs, putting it on a more level playing field with the likes of Johnson & Johnson.

Under Dvorak's leadership, the merger ran into a series of issues, beginning with delays in closing the deal and continuing with integration issues that made Biomet a hindrance to sales.

Revenue growth slowed as a result, and since then, the combined company has not been able to attain its expected growth levels, with organic growth averaging 1.3 percent over the last 10 quarters when the company's goal was closer to 4 percent.

"Some of the problem had to do with where Zimmer makes its money," Cramer said. "Even after the Biomet deal, the company gets roughly 60 percent of its sales from hip and knee implants, which is one of the slower growing segments in the space."

But issues with inventory management and manufacturing held Zimmer back from focusing on faster growing areas of its business, like its sports medicine, extremities and trauma division.

And while Zimmer's last earnings report beat Wall Street's expectations, management's forward guidance was disappointing and the stock declined 5 percent on the news.

That is why Dvorak's departure from both the company and its board was embraced by the market as welcome news, as Zimmer's stock flew to a 52-week high on Monday in response, Cramer said.

"Dvorak wasn't exactly doing a great job. His resignation signals to investors that the company might finally be ready to consider a major shift in its strategic direction," he said. "In fact, the analyst community had nothing but positive things to say about the shakeup."

Late last week, news also broke that activist firm Jana Partners took a stake in Zimmer and had already been talking with the board about strategic changes, making Cramer even more confident that the company could be back on the right track.

"Sometimes a company will have a seemingly great long-term story, like Zimmer after the Biomet deal, but for whatever reason, management can't execute to make that dream a reality. That's why Zimmer's stock has been climbing since we learned that CEO David Dvorak would be stepping down last week," the "Mad Money" host said. "And while I'm not ready to pound the table here [on a] 52-week high, if Zimmer brings in the right person, then I've got to tell you, this is going to be the terrific opportunity that I thought it would've been a couple years ago."

Cramer: With Zimmer Biomet, it's 'CEO you later!'

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