Arconic Leadership Has Generated $8 Billion of Shareholder Value in 8 Years i
Arconic (NYSE:ARNC) today provided a list of questions for investors to
ask Elliott Management (“Elliott”), which is seeking to elect four
directors to the Board of Directors of Arconic at the upcoming Annual
Meeting of Shareholders, to be held on May 16, 2017. In particular,
Arconic suggests that all shareholders ask Elliott questions on these
After three directors on Arconic’s Board were added last year at
Elliott’s recommendation, Elliott has now nominated four more
Question: How are other shareholders’
interests served by giving Elliott, a 13.2% shareholder, the privilege
of nominating seven of Arconic’s 13 directors?
Elliott suggests that Arconic’s Board install Larry Lawson as the new
CEO of Arconic. Mr. Lawson has a non-compete agreement with his prior
employer that legally restricts him from serving as Arconic’s CEO. In
fact, Mr. Lawson’s prior employer has stated that he is already in
violation of the agreement due to his involvement with Elliott.
Does Elliott believe that Mr. Lawson should violate his contractual
commitment to his prior employer? Is Mr. Lawson treating his prior
employer ethically by violating his non-compete agreement by offering
to work for Arconic?
Mr. Lawson is on Elliott’s payroll. In fact, Elliott has already paid
Mr. Lawson approximately $6.6 million in consulting fees and
indemnification for breaching his non-compete agreement. In total,
Elliott has agreed to pay him approximately $28 million over the
course of the next two years, regardless of whether Mr. Lawson becomes
Questions: Aren’t other shareholders’
interests best served by assigning the full Board the responsibility
of selecting the CEO? Why should that be Elliott’s privilege? How
would Elliott propose to resolve the apparent conflict of interest
caused by appointing a CEO to whom it is paying tens of millions of
dollars on the side?
When Elliott began its proxy contest, it produced an analysis
indicating that it thought Arconic’s Global Rolled Products (“GRP”)
division, which generated EBITDA of $577 million in 2016, could
increase its EBITDA by $750 million. Within a matter of days, Elliott
issued multiple revisions of its analysis and now seemingly believes
that EBITDA can only be expanded by $245 million.ii
Does the same prescription apply to a division that has an opportunity
to increase EBITDA by 42% as one that could more than double its
EBITDA? In light of Elliott’s admitted, significant analytical error,
how can shareholders rely on Elliott’s analysis or plans for Arconic’s
Elliott has compared Arconic’s Engineered Products Solutions (“EPS”)
business to that of Precision Castparts (“PCC”). However, EPS is
significantly smaller than PCC and does not participate in some of the
higher margin segments in which PCC is a market leader. Cowen and
Companyiii recently published a report noting “the
benchmark that Elliott cites is an unrealistic bar.”
Are Elliott’s conclusions about margin potential and underperformance
well informed? How specifically does Elliott suggest that EPS, despite
being much smaller and not participating in some high margin segments,
close the margin gap to PCC?
Klaus Kleinfeld was appointed as CEO of Alcoa Inc. when the Company
was highly levered and the price of aluminum was near an all-time
high. In the nine months thereafter, aluminum prices collapsed and
Alcoa Inc.’s stock price fell dramatically. Since then, shareholders
of Alcoa Inc., now Arconic, have seen Total Shareholder Return (“TSR”)
of 182%iv, as the Company generated $8 billion in
shareholder wealth in eight years.i Alcoa Inc. shareholder
return also outperformed both the S&P 500 Metals & Mining Index and
the overall S&P Metals & Mining Index since 2009.v
Alcoa Inc. was included in these two indices from 2009 until the
separation in November 2016, and unlike the broad S&P 500 index, these
indices include companies where earnings power and share prices are
highly correlated to underlying commodity prices, making these indices
the appropriate benchmark for comparison.
How can Elliott ignore the impact of the global financial crisis when
evaluating Alcoa Inc.’s shareholder returns? How does providing a
comparison to (i) broad market indices that are not directly levered
to commodity pricing or (ii) companies that were not comparable to
Alcoa Inc. for the vast majority of the time period provide
shareholders with any insight into Alcoa Inc.’s relative performance?
Shouldn’t Elliott focus on relative performance to indices that
include large-scale commodity producers with share price correlation
to commodity markets (i.e. S&P Metals & Mining and S&P 500 Metals &
Elliott has commended Alcoa Inc. for separating its business into two
publicly traded companies, Arconic and Alcoa Corporation. Indeed,
Elliott said that Alcoa Inc. would not be fully valued unless the
Company took action to split its businesses into two public companies.
Now, however, Elliott is using TSR data that deliberately excludes the
value created by the separation by measuring Mr. Kleinfeld’s
performance (and the Alcoa Inc. stock performance) only until the day
before the split into two public companies.
Why should shareholders ignore the value created by the successful
separation of Arconic and Alcoa Corporation in calculating the value
created by the current leadership team? Isn’t it disingenuous to
suggest that shareholders ignore the successful culmination of the
strategic transformation of Alcoa Inc. that was executed by Mr.
Kleinfeld and the rest of the management team under the oversight of
The current management team, led by Mr. Kleinfeld, has a strong track
record of performance that has been demonstrated before, during and
after completing the highly complex separation of Alcoa Inc. Following
actions taken to save Alcoa Inc. during the global financial crisis by
reducing costs and strengthening the balance sheet, the management
team executed a complex transformation of the upstream and downstream
businesses. The transformation built Arconic into the company it is
today, completing divestitures, organic growth projects and
acquisitions to focus on the high growth, high value aerospace and
automotive markets. Leadership created a successful culture of
innovation and technology, with a strong focus on cost competitiveness
and established deep customer partnerships that are the lifeblood of
Arconic. Arconic’s major customers, including Airbus, Boeing, GE and
United Technologies have all expressed their strong support for Mr.
Kleinfeld and his continued leadership of Arconic.
Why aren’t shareholders’ interests best served by a management team
with a strong and proven execution-focused track record? Wouldn’t
critical customer relationships be jeopardized by a change in
leadership and strategy as Elliott is proposing?
Arconic has a substantially new Board; seven of its 12 independent
directors have joined the Board in the last 15 months. Three of those
directors were added at the recommendation of Elliott. Directors have
met with Elliott, other shareholders, customers, suppliers and
employees. The Board has engaged in extensive analysis of Elliott’s
claims and of the strategy, performance and leadership of Arconic.
Why should shareholders doubt the judgment of highly qualified
independent directors who have worked diligently to evaluate Elliott’s
claims and have access to information that Elliott does not? Why
aren’t shareholders best served by these independent directors, a
majority of whom are new, three of whom were recommended by Elliott,
and all of whom concluded that Arconic has the right strategy and the
Information regarding the Company’s track record and plan for continued
value creation is available in its presentation to shareholders dated
March 27, 2017. The presentation and other materials are available at www.arconic.com/annualmeeting.
Arconic (NYSE: ARNC) creates breakthrough products that shape
industries. Working in close partnership with our customers, we solve
complex engineering challenges to transform the way we fly, drive, build
and power. Through the ingenuity of our people and cutting-edge advanced
manufacturing techniques, we deliver these products at a quality and
efficiency that ensure customer success and shareholder value. For more
Follow @arconic: Twitter,
Dissemination of Company Information
Arconic intends to make future announcements regarding Company
developments and financial performance through its website at www.arconic.com.
This communication contains statements that relate to future events and
expectations and as such constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include those containing such words as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,”
“guidance,” “goal,” “intends,” “may,” “outlook,” “plans,” “projects,”
“seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of
similar meaning. All statements that reflect Arconic’s expectations,
assumptions or projections about the future, other than statements of
historical fact, are forward-looking statements, including, without
limitation, forecasts relating to the growth of end markets and
potential share gains; statements and guidance regarding future
financial results or operating performance; and statements about
Arconic’s strategies, outlook, business and financial prospects.
Forward-looking statements are not guarantees of future performance, and
it is possible that actual results may differ materially from those
indicated by these forward-looking statements due to a variety of risks
and uncertainties, including, but not limited to: (a) deterioration in
global economic and financial market conditions generally; (b)
unfavorable changes in the markets served by Arconic; (c) the inability
to achieve the level of revenue growth, cash generation, cost savings,
improvement in profitability and margins, fiscal discipline, or
strengthening of competitiveness and operations anticipated from
restructuring programs and productivity improvement, cash
sustainability, technology advancements, and other initiatives; (d)
changes in discount rates or investment returns on pension assets; (e)
Arconic’s inability to realize expected benefits, in each case as
planned and by targeted completion dates, from acquisitions,
divestitures, facility closures, curtailments, expansions, or joint
ventures; (f) the impact of cyber attacks and potential information
technology or data security breaches; (g) political, economic, and
regulatory risks in the countries in which Arconic operates or sells
products; (h) the outcome of contingencies, including legal proceedings,
government or regulatory investigations, and environmental remediation;
and (i) the other risk factors discussed in Arconic’s Form 10-K for the
year ended December 31, 2016, and other reports filed with the U.S.
Securities and Exchange Commission (SEC). Arconic disclaims any
obligation to update publicly any forward-looking statements, whether in
response to new information, future events or otherwise, except as
required by applicable law. Market projections are subject to the risks
discussed above and other risks in the market.
Non-GAAP Financial Measures
Some of the information included in this communication is derived from
Arconic’s consolidated financial information but is not presented in
Arconic’s financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
Certain of these data are considered “non-GAAP financial measures” under
SEC rules. Arconic has not provided a reconciliation of any
forward-looking non-GAAP financial measures to the most directly
comparable GAAP financial measures because Arconic is unable to quantify
certain amounts that would be required to be included in the GAAP
measure without unreasonable efforts, and Arconic believes such
reconciliations would imply a degree of precision that would be
confusing or misleading to investors. In particular, reconciliations of
forward-looking non-GAAP financial measures such as adjusted EBITDA
margin to the most directly comparable GAAP measures are not available
without unreasonable efforts due to the variability and complexity with
respect to the charges and other components excluded from these non-GAAP
measures, such as the effects of foreign currency movements, equity
income, gains or losses on sales of assets, taxes and any future
restructuring or impairment charges. These reconciling items are in
addition to the inherent variability already included in the GAAP
measures, which includes, but is not limited to, price/mix and volume.
i Value represents the aggregate change in market value of
the total shares outstanding of Alcoa Inc. from March 18, 2009 through
March 1, 2017, plus dividends. Analysis begins on March 18, 2009, the
day prior to Alcoa Inc.’s recapitalization. Management and the Board
took decisive action to stabilize Alcoa Inc. in the face of extreme
market headwinds. On March 19, 2009, Alcoa Inc. priced $906M of common
equity and $575M of convertible debt, which ensured Alcoa Inc. would
have adequate liquidity to survive the 2009 financial crisis.
Calculation based on closing prices and reflects Arconic analysis of
Capital IQ data.
ii Elliott Definitive Proxy Statement,
filed March 9, 2017, p. 11.
iii Cowen and Company equity
research report, “ARNC Initiation: PCP’s Margin Bogey is Unrealistic”,
March 29, 2017; Permission to use quotations neither sought nor obtained.
Represents package value to Alcoa Inc. shareholders from March 18, 2009
through March 1, 2017. Package value to Alcoa Inc. shareholders includes
Alcoa Inc. total shareholder return through October 31, 2016. From
November 1, 2016 through March 1, 2017, package value to the Alcoa Inc.
shareholder is calculated based on the performance of 1 share of Arconic
and 1/3 share of Alcoa Corp. On November 1, 2016, as a result of the
separation, every shareholder of Alcoa Inc. retained 1 share of Arconic
and received 1/3 share of Alcoa Corp. for every 1 share of Alcoa Inc.;
the package value calculates the total value to the former Alcoa Inc.
shareholder over the specified time period. Calculation based on closing
prices and reflects Arconic analysis of Capital IQ data.
indices that Alcoa Inc. was included in every year leading up to the
separation: S&P 500 Metals & Mining Index and S&P Metals & Mining
Index performance reflects the period March 18, 2009 to March 1, 2017.
Performance calculated based on closing prices using data sourced from