Elliott's (Minor) Arconic Complication

The activist's top CEO candidate faces a non-compete challenge, but that changes very little.
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Arconic Inc. CEO Klaus Kleinfeld can't count on a compensation complication to spoil an activist's campaign to oust him.

Elliott Management Corp. disclosed in regulatory filings this week that its top candidate to replace Kleinfeld at the $12 billion company has been accused of violating a non-compete agreement. Larry Lawson retired as CEO of Spirit AeroSystems Holdings Inc. last summer and agreed to neither manage nor consult with any business that competes with his previous employer through July 2018. According to Elliott, Spirit believes Lawson's appointment as an adviser to the activist investor regarding his potential service at Arconic puts him in violation of that, so it's withholding promised payments.

Taking Off

Spirit AeroSystems outperformed the broader market under Lawson

Source: Bloomberg

Both Elliott and Lawson dispute this interpretation. I'm not a lawyer so I don't know. Spirit would seem to be defining its industry rather broadly to include both a hedge fund and a company that supplies components for some of its main fuselage, propulsion and wing systems products. For what it's worth, Spirit doesn't list either Arconic or its pre-breakup Alcoa Inc. predecessor as a primary competitor in its regulatory filings. Barclays did use Spirit as a comparable to RTI International Metals when evaluating the financial fairness of Alcoa's $1.5 billion purchase of the company in 2015. That business now resides with Arconic.

This development adds a wrinkle to Elliott's efforts to present Lawson as a more qualified candidate to lead Arconic than Kleinfeld. It's not a great look in light of the activist investor's fumbled messaging on its valuation case for Arconic. That said, this doesn't seem to change the situation. Lawson's track record of delivering the kind of profitability and stock-price improvements that Elliott and other investors are seeking isn't in dispute, even as he's billed by some as being a difficult negotiator with customers. For now at least, Spirit's resistance to Lawson's consulting arrangement with Elliott or any potential future service with Arconic appears to be limited to withholding payments.

Show Me

While Lawson has his critics, he has a track record of getting results. Kleinfeld also has a lot of critics and more debatable results.

Source: Bloomberg

Questions over forfeited pay seem to be a theme these days with activist situations. Recall that Mantle Ridge is seeking to stick CSX Corp. with the bill for $84 million in benefits and compensation it agreed to cover in order to lure the company's now CEO Hunter Harrison away from the top post at Canadian Pacific Railway Ltd. ahead of schedule. CSX has said Mantle Ridge also at one point asked for reimbursement of a $2 million annual consulting agreement it had inked with Harrison.

But Elliott's battle with Arconic isn't Mantle Ridge-CSX part deux. Spirit to date has withheld payment of about 71,000 shares and about $1.2 million in cash due to Lawson, according to Elliott's filing. Its total remaining obligations amount to almost 410,000 shares and roughly $2 million in cash. The amount in question here is in the millions, but it's a far cry from $84 million. And Elliott has agreed to take on a big chunk of the costs associated with installing Lawson as CEO. It's already paid about $5.4 million under its agreement to indemnify "certain potential claims, losses and expenses" that may arise for Lawson. Most importantly, it hasn't shown any intention of passing on that cost to Arconic.

Elliott is also covering the cost of its $100,000-a-month consulting agreement with Lawson and potential lump-sum payments that could amount to as much as $4 million in the event he isn't made CEO. 1 It's footing the bill because "we understand the value of finding a highly-in-demand operating executive with such a superb track record and directly relevant experience who would be available to lead the kind of turnaround necessary at Arconic."

Tug of War

Arconic shares initially climbed as Elliott launched its campaign, but the stock has come under pressure over the past week as the company continued to resist a CEO change

Source: Bloomberg

The ultimate question for shareholders is really Kleinfeld or not Kleinfeld. Lawson is Elliott's top choice, but it's not pushing for him to be the one and only CEO candidate as Mantle Ridge did with Harrison at CSX. Elliott wants a search committee to look at other possibilities as well. 

Kleinfeld still has the unanimous backing of Arconic's board of directors, which has touted among other things his value-creating (albeit belated) separation of the aluminum-parts business from the Alcoa mining and smelting operations last year. But Elliott has garnered support among other large shareholders for its complaints about lagging margins and out-of-date corporate governance policies, while Arconic's stock has added about $2 billion in value since it launched its campaign.

Lawson's compensation questions aren't going to be a game-changer in this battle. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Elliott has agreed to pay Lawson a lump sum of $1 million, which he would have to spend on shares of Arconic should he become CEO on or before July 31. The activist investor has also agreed to pay Lawson an additional $3 million if he isn't named CEO on or before July 31. 

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

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