Arconic Shareholders’ Calls for Kleinfeld’s Ouster Mount
07 February 2017 by Christopher Clemence
Arconic’s chairman and CEO Klaus Kleinfeld has found himself in the crosshairs of company shareholders in recent days, mere months after navigating Alcoa through the straits of a widely-lauded demerger. According to unnamed sources interviewed by the Wall Street Journal, several of Arconic’s biggest shareholders are urging the company to find new leadership. The discontented shareholders cite Arconic’s performance since the demerger – in the company’s initial quarterly report, Arconic showed a loss of over US$1 billion in the last three months of 2016.
Kleinfeld entered the position as something of a corporate rock star. The Bremen-born businessman was appointed as Chief Operating Officer of Alcoa Inc. in the fall of 2007, moving over from Siemens AG. He was named Chief Executive Officer the following spring, and then given the position of chairman of the firm two years later.
To say that Kleinfeld’s tenure didn’t get off to a good start is an understatement. The bottom dropped out beneath Alcoa’s stock during his first year at the tiller, leading to its ejection from the Dow Jones Industrial Average. Although the stock recovered 90% of its value in the ensuing months up to the split, company stock lost 68% over the course of his tenure. The crash of the commodities market and the glut in aluminium production from China pushed aluminium prices into the cellar, making life difficult for ex-China producers. Under Kleinfeld’s tenure the decision was made to strip off the upstream portion, which is far more affected by aluminium market volatility, from its value-add portion. The move made sense to market watchers and experts alike.
However, the stock market has not been kind to Arconic – the company’s stock has risen just 1.7%, while that of Alcoa Corp. has regained 66% of its value. The firm’s stock has suffered due in no small part because of the decaying financial picture. Projections continue to be revised downward, and spending has caused concern among some of the more prominent shareholders. Prior to the breakup, Alcoa purchased US$4.6 billion on acquisitions to increase its presence in the aerospace industry. A particularly disappointing acquisition was that of Firth Rixon in 2014 – a purchase that analysts declare has not resulted in the returns that the company had hoped for.
Elliott Management Corp., who has been described by some as an activist shareholder and others as a vulture fund, is Arconic’s largest single shareholder and is among the choir of voices seeking Kleinfeld’s ouster. The fund, which first bought into Alcoa Inc. in late 2015 and currently holds a 10.3% stake, recently described Arconic’s stock as “dramatically undervalued.” This shot across the bow may be part of an opening salvo in a fight for control of the company. The fund and the firm have been working under a truce for about a year as a result of an agreement giving Elliot control over three seats on the board of directors. Experts now believe that the hedge fund will soon begin angling for more spots on the board.
Elliot makes the case that Arconic’s underperformance is significant. They argue that shareholder returns under Kleinfeld’s tenure are less than that of other industrial countries, other aluminium companies, and the S&P 500. The mutual fund says that cost-cutting measures and adjusting margins to match those of the rest of the industry could add up to 138% to Alcoa’s stock price. Elliot has gone so far as to engage the services of Larry Lawson, once the CEO of Spirit Aerospace, as a consultant. The fund touts him as a suitable replacement for Kleinfeld, saying he has “the ideal set of skills needed to turnaround Arconic’s woefully and continually underperforming business.”
Arconic’s independent directors were quick to come to Kleinfeld’s defense. In a statement released on Monday, the twelve independent directors declared their unanimous support for Kleinfeld. Among the reasons for their support of him are increased margins for the business as a whole and for individual product areas. The firm’s adjusted EBITDA percentage margin increased from 6.9% in 2008 to 16.6% last year. Arconic’s engineered products and services increased its adjusted EBTIDA percentage margin from 13% to 21%, global rolled products increased adjusted EBITDA percentage margin from 3% to 12%, and transport and construction solutions increased adjusted EBITDA percentage margin from 6% to 16%.
Independent directors also point out cost control measures that have been implemented under Kleinfeld’s watch as well. Between 2008 and the separation last November, Alcoa Inc. has seen costs reduced by US$10 billion, thirty percent of which they say has impacted the bottom line as a net saving. Additionally, the success of Alcoa Inc. and the successful launch of Alcoa Corporation is cited as points in his favor. Kleinfeld’s tenure saw the closure of 43% of the company’s high-cost smelting capacity and 35% of its high-cost refining capacity. Alcoa also separated its energy assets and smelting assets, creating a profitable energy business and closing unprofitable smelters in Brazil. Perhaps most notably the company developed the Alumina Price Index. The new Index allowed for a separate metric that does not rely upon aluminium’s LME price.
Despite the fact that the board has shown support for Kleinfeld, his future as head of Arconic is looking bleaker and bleaker by the day. As the board was releasing its statement of support, another major shareholder came out against Kleinfeld. According to another WSJ report, First Pacific Advisors LLC sent a letter to the board calling for his ouster. The firm, which holds 4.5% of Arconic’s stock and is among the company’s top five stockholders, also pointed to exorbitant spending and failure to meet projections as rationale. First Pacific says it hopes Arconic settles its fight with Elliot in order to avoid the distraction it would become. Whether Arconic chooses to cave to mounting pressure and how big a distraction it becomes remains to be seen.