Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Park Avenue's business corridor -- the row of steel-and-glass buildings that stretches from Grand Central Terminal to 59th Street -- is one of the more expensive places in America to have an office. It's home base to JPMorgan Chase & Co., boutique investment bank Greenhill & Co....and aluminum-parts maker Arconic Inc.?

The $12 billion company -- formerly known as Alcoa before spinning off its mining business last year -- is under fire from activist investor Elliott Management Corp., which is calling for CEO Klaus Kleinfeld's removal. You can read more about the campaign here, but among the hedge fund's complaints are Arconic's corporate overhead expenses and Kleinfeld's "globe-trotting" lifestyle. First Pacific Advisors, a top 10 holder that's backed Elliott, calls the 390 Park Avenue headquarters (at the iconic Lever House building) "excessively expensive."

This Old Thing?
Midtown office space is still among the priciest in Manhattan, although an influx of technology companies in the the lower quadrants of the city are driving up prices there
Source: Jones Lang LaSalle. Overall asking rent accounts for subleased space.
The areas of Chelsea, Gramercy Park, Hudson Square, Greenwich Village and SoHo are considered to "Midtown South."

And they've got a point. New York in general is a pricey place, but average asking rent for high-quality Midtown office space in the fourth quarter of 2016 was nearly 30 percent more than comparable buildings in downtown areas such as the Financial District, according to Jones Lang LaSalle. That differential is one reason why a number of companies -- including Citigroup Inc.  -- have chosen to abandon Park Avenue locations and consolidate office space in other New York neighborhoods.

Kleinfeld, who joined Alcoa's board in 2003 and became CEO in 2008, didn't pick the headquarters. Alcoa started a 20-year lease at 390 Park Avenue in 2000 and began listing New York as its primary executive office in 2006. But once CEO, he also could have chosen to shift the home base -- symbolically or literally -- back to Pittsburgh, where the company still has significant operations. Arconic says only about 80 of its more than 42,000 employees work in New York and it has reduced square footage at the office by a third as a result of the Alcoa split and subsequent cutbacks. That's great, but it's still not entirely clear why it needs an office in Manhattan at all, let alone in one of the most expensive areas.

Road Trip
Other cities aren't as expensive as the New York area where Arconic is based
Source: Reis Inc.

Sure, New York has big pools of talent, but cheaper metropolises offering better lifestyles and a lower cost of living have seen their populations balloon. Global firms in similar industries seem to make do with less ritzy digs and perhaps a connecting flight or two. 3M Co., for example, gets more than half its revenue from outside the U.S., but it's fine keeping its headquarters in St. Paul, Minnesota, and just opened a state-of-the-art $150 million research center there. The only New York facility listed on its website is a plant in Tonawanda, roughly 400 miles from Manhattan. 

In fact, there are only about a dozen U.S. industrial, materials, energy and utilities companies of size that list their principal executive office in SEC filings as New York, according to a Bloomberg Gadfly analysis.  Another aerospace supplier, L3 Technologies Inc., is among this group and that also doesn't make a ton of sense; its stock performance may be one reason why investors aren't as concerned.

Not Like the Other
L3's stock has more than doubled over the past five years, outpacing the broader S&P 500 Index and a basket of industrial peers
Source: Bloomberg

There are plenty of companies that have corporate outposts in Manhattan, but locating its CEO there and having that Park Avenue address at the top of filings creates a symbolic eyesore for Arconic.  Obvious and extraneous costs are prime pickings for activists and are difficult to justify, even if in the scheme of things they aren't the main driver of lagging profitability. Hess Corp., which was targeted by Elliott in 2013, has an arguably unnecessary New York headquarters. NRG Energy Inc., a power producer at which Elliott is seeking changes, has its primary office in the also not-cheap Princeton, New Jersey (though an NFL stadium sponsorship that touts its money-losing home solar business is perhaps more questionable.)

Arconic says it's aiming to reduce corporate overhead to less than 1 percent of its revenue by 2019. Making further cutbacks in its Manhattan office space might help it get there faster and serve as an act of goodwill to shareholders. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. For what it's worth, Spirit AeroSystems Holdings Inc., previously led by Larry Lawson, the guy Elliott wants to replace Kleinfeld, is based in Wichita, Kansas. Average asking office rents there were about $14.68 per square foot for Class A and B buildings in the fourth quarter, according to Reis Inc. That compares with $86.77 on average for the best buildings in the area near Grand Central Terminal in Manhattan. 

  2. That group shrinks further when you eliminate Consolidated Edison Inc., which gets a pass in my mind because it provides electricity to the area, and two others that are industrial holding companies or trusts.

  3. General Electric Co. moved its headquarters from Fairfield, Connecticut to a more urban location, but it chose Boston over the pricier New York. Within Manhattan, it traded the views of 30 Rock for a less glamorous, though more tech-friendly, Madison Avenue space. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net