Elliott Management, the activist investment group, has called for the removal of Klaus Kleinfeld as chief executive of Arconic, the specialist metals and components company created last year by the break-up of Alcoa, arguing that “current management’s persistent failure . . . has destroyed considerable shareholder value”.
The fund manager, Arconic’s largest shareholder with direct control of 10.5 per cent of the group’s shares, and a further 1.6 per cent through derivatives, has also nominated five new directors to the company’s 13-member board. They would be in addition to three who joined Alcoa’s board following pressure from Elliott a year ago, and who are directors at Arconic.
Arconic said in a statement that its board, including the three directors nominated by Elliott, were unanimous in their support of Mr Kleinfeld.
It added the board “has conducted an intensive and extensive review of Elliott’s allegations and has concluded that many of them are misleading or not substantiated”.
In a presentation, Elliott argued that the total shareholder returns achieved by Mr Kleinfeld at Alcoa and then Arconic had underperformed other industrial companies, other aluminium groups, and the S&P 500 index since the high-profile former Siemens chief executive took over in 2008.
It added that cutting costs and improving margins to match industry leaders including Precision Castparts, the component manufacturer owned by Warren Buffett’s Berkshire Hathaway, could add 45-138 per cent to Arconic’s share price. Arconic shares closed on Tuesday at $22.79, up 23 per cent year to date.
Elliott said it had hired Larry Lawson, the former chief executive of Spirit AeroSystems, as a consultant with “the ideal set of skills needed to turnaround Arconic’s woefully and continually underperforming business”, and urged investors to consider him as a replacement for Mr Kleinfeld as chief executive.
The move was announced less than an hour after Arconic reported a loss per share of $2.88 for the fourth quarter of 2016, after taking a charge of $1.4bn relating to the split, about $1.3bn of which is in an increased tax liability.
Underlying performance improved, with after-tax operating earnings rising 7 per cent to $227m in the quarter.
Mr Kleinfeld told analysts on a call that the company was “squarely concentrating on improving our operating performance” through cost reduction, margin enhancement and profitable revenue generation. It had also “intensified our focus on capital efficiency [with] an owner’s mindset”, he added.
He also said that in the course of the Alcoa split the company had “adopted state of the art practice with our board reaching out to shareholders”.
In its presentation, Elliott said it wanted to instil at Arconic “a culture dedicated to fierce operational focus”, foster an entrepreneurial attitude and “eliminate image-driven and wasteful culture”, as reflected in a glitzy advertising campaign based on The Jetsons TV series, and the retention of offices in the same building as Alcoa’s headquarters on Park Avenue, Manhattan.
At Spirit, which makes aircraft components including the fuselage for the Boeing 737, Mr Lawson was credited with turning round its financial performance. During his time as chief executive, from 2013 to 2016, Spirit’s shares outperformed the S&P 500 by 108 per cent, Elliott said.
The fund manager quoted analysts at Barclays describing Mr Lawson in 2013 “a tough change agent with unrelenting demands on performance improvements”.
By contrast, it added, the shares of Alcoa and then Arconic had underperformed the S&P 500 under Mr Kleinfeld’s leadership since 2008, while the companies had repeatedly missed guidance for earnings, and had failed to generate a return on investment to cover their cost of capital.
Arconic said its board had “endeavored to work constructively with Elliott and believes that the continued effort by Elliott is disruptive and contrary to the best interests of all shareholders”.
It said the board would put forward a rival set of director nominations to Elliott’s for the company’s annual meeting, which has not yet been scheduled but is seen as likely to be in May.
Elliott’s pressure on Arconic follows its recent success in bringing about a shake-up at Marathon Petroleum, the refining and fuel sales group, and its stakebuilding in NRG Energy, the power generator.
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