KB Home’s new CEO faces rough landscape
Jeffrey Mezger got bitten by the building bug at an early age.
As a teenager growing up in Chicago, he would often help out at his family’s building business, laying sod or painting walls, even accompanying his developer father to planning commission meetings that would often last until midnight.
“I actually liked it,” he said.
Mezger, 51, may need to keep those fond memories close at hand in his new role as chief executive of KB Home, the fifth-biggest U.S. home builder.
Mezger must steer the Westwood-based company through a housing slowdown that has throttled home sales at his company and others. He also must maneuver the company through legal troubles related to the stock option scandal that led to the sudden ouster Sunday of its longtime chief executive, the high-profile industry leader Bruce Karatz.
Some see the biggest test of Mezger’s management skills to be how he fills the shoes of Karatz, a three-decade veteran of the company known for his charisma and outsize personality. He was, in effect, KB Home.
“We think the main challenge for Mezger will come in terms of establishing a similar leadership persona at the company,” Daniel Oppenheim, an analyst at Banc of America Securities, wrote in a note to clients.
With the departure of Karatz, the company loses “a tremendous amount of experience and vision that has actually served KBH very well, not only during the boom, but also in the early phase of the downturn,” said Stephen East, an analyst at brokerage firm Susquehanna Financial Group in Bala Cynwyd, Pa.
Mezger seemed to pass his first test, at least with investors. On Monday, KB Home’s stock rose 96 cents, or 2%, to close at $44.78.
But some regulators and investors may not be so kind. The Securities and Exchange Commission has been conducting an informal probe of the company’s stock option practices since late August. Mezger and other executives and board members already face civil suits from shareholders who allege they were wronged.
“Unfortunately, the resignations are only the end of a chapter, not the book,” analyst East said.
KB Home’s board has concluded that Mezger, the company’s chief operating officer since 1999, and other current senior executives had no role in the options manipulation. The company said Sunday that an internal investigation by its board concluded that Karatz had a direct role in setting “incorrect” dates for stock option grants that inflated their value for himself and other executives.
That made Karatz among the nation’s highest-profile executives to lose his job in a scandal that has now enveloped more than 150 companies nationwide.
Last year, Mezger personally booked $12.8 million in total compensation, plus an additional $24 million from exercising stock options.
Besides bolstering the troops after Karatz’s sudden departure, Mezger must also tackle the housing slowdown that might very well get worse before it gets better.
“We’re all energized and focused on the business at hand,” Mezger said. “The succession will be a fairly seamless transition.”
Industry analysts generally expect that to be the case, thanks to Mezger’s efficient running of KB Home’s U.S. building operations for the last seven years. During that time, he increased the company’s presence outside California by doubling the number of states in which it operates, from 17 to 34.
Still, about 50% of the company’s homes are built in the once-hot markets of California, Arizona and Nevada, which are now slowing considerably.
He also pushed for expanding the company’s core product line of entry-level single-family homes by adding high-density condominium projects and high-end luxury homes. He is credited with leading the company’s successful partnership in branding homes with lifestyle entrepreneur Martha Stewart.
“He gets a lot of praise for his creativity, his attention to detail and his focus on projects,” said Steve Johnson, regional director of industry consultant MetroStudy.
“With hundreds of millions [of dollars] going into each project, companies need to introduce new concepts to bring their product into the front of consumers’ minds. I would expect to see him introduce a lot more concepts in his new role.”
Mezger directed KB Home’s highly regarded business model that emphasizes the building of fewer homes on “spec” -- built with no pre-sold buyers -- and giving customers a wide range of options at its sales showrooms. ‘It’s a very effective model in good times or bad,” Mezger said. “We will build a home with the features [buyers] know they want in it. Whether it’s a $150,000 condo or a million-dollar luxury home, buyers get a significant choice in customization.”
But KB Home and its competitors are seeing fewer buyers lately. In the most recent fiscal quarter ended Aug. 31, KB reported a 43% plunge in new-home orders versus a year earlier. Mezger calls the situation “a disconnect between supply and demand” that’s exacerbated by the high cost of housing, particularly in Southern California.
He expects demand eventually to come into balance with supply but declines to be more precise. “The challenge is to keep things affordable,” he said.
Mezger said he intended to leave intact the company’s management team -- one that he largely recruited over the last seven years. “We have a strong team and it will continue to be the same going forward,” he said.
Until this week, Mezger had quick and easy access to Karatz. Employees say it was not unusual for either executive to be seen wandering in and out of the other’s office on the seventh floor of KB’s Westwood headquarters.
Mezger was careful in his comments Monday about Karatz, who hired him from U.S. Home Co. in 1993 to serve as KB Home’s Antelope Valley division manager. He became chief operating officer in 1999.
“Bruce was a good business partner and friend in the day-to- day running of the business,” Mezger said. “You can learn from everyone you work with, especially when you work with someone for that many years.”
Unlike Karatz, Mezger will not become board chairman in addition to CEO. The board has launched a search to find KB Home’s first nonexecutive chairman.
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Back story
Name: Jeffrey Mezger
Age: 51
New job: Chief executive of KB Home
Career: With KB Home since 1993, serving as executive vice president and chief operating officer beginning in 1999; from 1983 to 1993, was president of U.S. Home’s Central California division.
Total compensation in 2005: $12.8 million
Source: Times research
