For months, Philip Morris Cos. investors had waited. Well before CFO Hans G. Storr hinted at the possibility at an analysts' meeting in Europe in mid-April, they had talked eagerly of splitting off the $61 billion company's food operations from its hugely profitable but troubled tobacco units.
Instead they got a boardroom brawl. At Philip Morris' May 25 board meeting, investors and former PM executives say, Chairman and CEO Michael A. Miles locked horns with former Chairman Hamish Maxwell, who heads the board's powerful executive committee. Six-and-a-half hours and two press releases later, the proposal clearly had been defeated. The company announced that its board had "considered" the possibility of a split and "decided to take no action."
PROXY FIGHT? Philip Morris shares have dropped more than 10% since the meeting. Now, shocked investors, their shares languishing at roughly half of their 1992 high, are organizing to fight the company. Some big institutional holders plan to lobby directors directly. A few are threatening a proxy fight to force a division of the company at its next annual meeting, scheduled for April, 1995. "If you have a number of interested shareholders, you eventually get some action," says Richard H. Koppes, general counsel at California Public Employees' Retirement System, which owns 5.1 million shares of Philip Morris.
Why did Philip Morris so abruptly ditch its shareholders? Executives and directors aren't talking, and a spokesman says only: "I can tell you right now we're not going to comment on anything that was discussed at the board meeting." Miles was unavailable for interviews; Maxwell could not be reached.
But Miles, a former Kraft Inc. executive who swore off smoking years ago, is said to strongly support spinning off the tobacco operations. Maxwell, who spearheaded Philip Morris' acquisition of Kraft and General Foods Corp. back in the '80s, opposes the move because he doesn't want his empire dismantled, investors say. "A number of us have gotten indications that the problem is not Miles, it's the board," says Sarah Teslik, executive director of the Council of Institutional Investors.
Miles heads Morris' star-studded board, but Maxwell appears still to wield considerable influence: 15 of the company's 17 other directors, including Citicorp Chairman John S. Reed, media mogul Rupert Murdoch, and William H. Donaldson, chairman of the New York Stock Exchange, were elected on his watch. "Given Maxwell's grip on the board, Miles made significant inroads," at the May 25 board meeting, says William Patterson, corporate-affairs director of the International Brotherhood of Teamsters, whose pension funds own several million shares of Philip Morris. Not enough, apparently, to win--though Miles did at least secure the support, investors say, of Stephen M. Wolf, chairman of UAL Corp., who became a director in 1993.
"A WALL." The internal rift could prove costly. Investors are steamed because a dismantled Morris could kick out big, fast profits. In one scenario, devised by investor Progressive Partners Inc., Morris would be split into three pieces: domestic tobacco, international tobacco, and a global food company (table). The domestic tobacco unit could bring in $15 a share and international tobacco operations about $25 a share. The global food company, free of tobacco liabilities, could trade at $35 per share. The sum of those parts, $75, is a lot higher than the $48.50 Philip Morris closed at on June 1.
That day, a group of six big pension-fund investors sent letters to each of Philip Morris' board members asking for a meeting to discuss a split. "We want to understand the board's decision--what is the board thinking here--and it's hard to understand when you erect a wall of silence," says Jon Lukomnik, deputy comptroller for pensions for New York City, which owns 5.7 million shares of Philip Morris stock.
Lukomnik and others among Philip Morris' investors have seen battle before. New York's pension fund, for one, was active in persuading Sears, Roebuck & Co. directors--Miles among them--to adopt a number of shareholder resolutions in 1993. Now, Bruce Gregory, a portfolio manager at Progressive Partners, hopes Miles learned "how shareholder pressure at Sears did result in better valuation of stock." Maybe Miles did. Morris' other directors, though, apparently haven't got the message.