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

Proxy fight it is then.  

On Monday, Arconic Inc. gave an update on settlement talks with Elliott Management Corp. over the activist investor's push for a board shake-up at the $11.7 billion metal-components maker. I didn't think it was possible for the situation to get any more dramatic after the vaguely threatening (and rather bizarre) letter to Elliott founder Paul Singer that cost Arconic CEO Klaus Kleinfeld his job, but here we are. Let's just say there doesn't appear to be a lot of settling happening.

Looking for a Fight
Since Elliott embarked on its campaign to oust Kleinfeld, Arconic has responded in kind -- but it's often come out looking like it's playing catch-up
Source: Bloomberg

Arconic says it agreed to install two of Elliott's director nominees, but refused to allow its approved board members to constitute the majority of an operations committee that would help oversee the company. It's not clear where Arconic stands on Elliott's desire to designate the bulk of a CEO search committee. The aggressiveness of Arconic's statement -- which accuses Elliott of trying to micromanage the company and exert undue influence -- would seem to point toward a showdown vote at the company's annual meeting. At this point, that might be the only way to effect change both sides can feel comfortable with.  

While having an operations committee wouldn't entail the addition of more Elliott-backed directors, it would give the board and specifically Elliott's nominees more power. That doesn't seem like such a bad idea. The ousting of Kleinfeld and the manner in which it was handled with a press release packed with flowery praise suggested a bigger cultural shift and some outside perspective may be needed. Arconic's interim CEO -- David Hess -- also joined the company less than two months ago, so a little backup probably couldn't hurt.

There is precedent for this arrangement. Citrix Systems Inc. established an operations committee in 2015 as part of a settlement with Elliott. Citrix shares have climbed about 52 percent since then, more than two-thirds the gain of the S&P 500 Information Technology Index. The rise has been fueled by margin improvements, a $1.8 billion merger of Citrix's GoTo business with LogMeIn Inc. and speculation of a sale for what remains.

On the Up and Up
Margins have improved at Citrix since Elliott negotiated a settlement with the company that included the formation of an operations committee, as has the stock price
Source: Bloomberg Intelligence

For what it's worth, the Wall Street Journal has reported that Arconic offered back in January to create "a board committee that would focus on operations" in an effort to make peace with Elliott and stave off a proxy fight. If that's true, it seems needlessly aggressive for Arconic to be digging in its heels over this detail now when it's already sort of lost the bigger war. It didn't help itself with the back and forth over who lodged a personal attack at whom.

That said, I can also see Arconic's point: this proposed settlement would have given Elliott a hand in the selection of five of the board's directors (including the three it previously recommended in a past proxy fight) and, by extension, a least some involvement in deciding who's the next CEO. Does it really need more operational oversight? That may be what investors want -- Elliott isn’t the only shareholder that's advocated for a board shake-up -- but they could decide that for themselves with a vote.

Arconic must be feeling confident about the first-quarter results it's set to report on Tuesday after the market close to put out such a feisty statement. It will be the company's second earnings release since splitting with its Alcoa Corp. mining and smelting operations in November. But shareholders will want to see more than one quarter of good numbers. Even a marginal miss will strengthen Elliott's case and win supporters to its cause.

Building Faith
Analysts' EPS estimates for the first quarter have recovered somewhat since plunging on the back of Arconic's disappointing fourth-quarter results
Source: Bloomberg

Arconic's board is right that a reasonable settlement "could benefit all shareholders." But the only way to do that at this point may be to let investors decide.

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

  1. As part of Monday's announcement, Arconic pushed the date of that meeting back from May 16 to sometime later in the month.

  2. It's debatable whether Citrix will find a buyer willing to pay up for it, but the culprits are its large size and poor sales growth of late, not the existence of an operations committee.

  3. Arconic again acknowledged the inappropriateness of Kleinfeld's letter, but also pointed to the "direct personal attacks" that Elliott has made against Kleinfeld in its presentations. The hedge fund has called him a globe trotter. Kleinfeld alluded to Singer's alleged "lastingly legendary" antics at the 2006 World Cup.   

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