(Bloomberg Opinion) -- It’s much easier to be a spectator than a player. That’s true in sports, but also in activist investing.
Elliott Management Corp. spent years pushing for changes at Arconic Inc. and its pre-breakup predecessor Alcoa Inc., arguing a better management team could steer the company toward higher profit margins. It was successful in removing many leaders, but less so in achieving a higher stock price.
The hedge fund had a hand in picking at least seven of Arconic’s 13 board members, including CEO Chip Blankenship, whose one-year tenure ended abruptly on Wednesday as Arconic announced he would be replaced by Chairman John Plant. Plant joined Alcoa’s board in 2016 as part of a pact with Elliott to add more manufacturing expertise ahead of the separation of its mining and smelting operations. Elmer Doty, whom Elliott campaigned for as part of a 2017 proxy fight that saw former CEO Klaus Kleinfeld ousted, will be the chief operating officer. Arthur Collins, a legacy board member, will be lead director.
To put it mildly, this is messy and bizarre. Blankenship’s ouster comes just two days before the company is scheduled to report earnings (something it apparently still intends to do) and only two weeks after buyout negotiations with Apollo Global Management suddenly collapsed. Recall that Elliott had actually campaigned for former Spirit AeroSystems Holdings Inc. CEO Larry Lawson to take the top job at Arconic. Blankenship bizarrely waited three months after he was named CEO to start in the role. The ongoing upheaval underscores how difficult it is to actually run a company and achieve desired results, something I try to keep in mind myself as I lob commentary from the sidelines. Turnarounds are never as easy as just getting rid of the previous guy, particularly after a bruising proxy fight.
In its initial proxy-fight materials, Elliott argued Arconic could achieve at least a $33 share price by cutting corporate costs and boosting margins for its engineered products and global rolled products divisions to be more in line with peers. Arconic changed its earnings metrics, so reported numbers don’t line up exactly with Elliott’s targets, but on the new definitions, segment profit margins slipped at those two units through the first nine months of 2018 relative to the year-earlier period. Apollo was reportedly offering $22.20 a share, which is actually a bit below where the stock traded before Elliott launched its 2017 push to oust Kleinfeld.
The limping stock price can be blamed in part on the fallout from steel and aluminum tariffs, Russia sanctions and legal challenges over combustible cladding that’s blamed for the rapid spread of London’s Grenfell Tower fire in 2017. A seeming lack of investment by the prior management team put new leadership on the back foot before they’d even started. That’s tough luck, but those are also the kinds of things you deal with when you take on a turnaround of an underperforming company. Rather than manage through those those setbacks, the story line around Arconic has increasingly been one of financial engineering. Arconic reportedly surprised Apollo with its public rebuff of takeover talks that had stretched on for months and its declaration that it would no longer be pursuing a sale as part of its strategic review. At issue was Arconic’s large unfunded pension obligations and what the company felt like was an underwhelming commitment by Apollo to finance those liabilities. It’s unclear where this CEO change leaves the jilted buyer.
One way to read this is that Blankenship thought he was there to sell the company and wasn’t terribly interested in continuing to run it in the absence of a deal. But that doesn’t quite add up, as Blankenship seemingly did a decent job with a very difficult situation. Furthermore, Plant only plans to serve as CEO for one year and to oversee what is now apparently an “ongoing” portfolio review. This is particularly curious because Plant was the one quoted as rejecting the prospect of a sale. He raised the idea of “other potential initiatives” in his rebuff.
Taking all these facts together leads me to question whether the update on the strategic review that Arconic intends to give Friday with its earnings release will focus on a breakup. This is something I’ve said from the start made more sense than an outright sale for the parties involved. A partial deal is a smaller, less risky bite for a private equity firm as fears mount about cooling economic growth — and it would give Elliott one last shot to prove it the operational improvements it envisioned at Arconic are actually achievable.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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