Kleinfeld’s Rogue Response Seals Fate as Elliott Prods Arconic

  • CEO steps down after letter to fund seen as ‘poor judgment’
  • Victory for billionaire Singer as activist frenzy accelerates

In the end, Klaus Kleinfeld was his own worst enemy.

Having left Siemens AG a decade ago after a bribery scandal involving other employees, he landed on his feet as head of aluminum giant Alcoa and became a U.S. business leader. He expanded the company into engineered components for planes and cars, took the helm at parts maker Arconic Inc. when it split from Alcoa last year and won a spot on President Donald Trump’s manufacturing council.

But the 59-year-old’s downfall came from his rogue response to a challenge by Elliott Management Corp., the New York hedge fund controlled by billionaire Paul Singer. Following weeks of hostilities, he fired off a letter to Elliott that the fund described as threatening. Kleinfeld agreed to leave his post Monday after Arconic’s directors said he showed “poor judgment.” Elliott vowed to push ahead with plans to win board representation.

“We’ve never seen anything like this before,” Carol Levenson, research director at Gimme Credit, said in a note. “Arconic looked as though it was determined to fight Elliott Management to the finish and as recently as last week was in full support (along with some of its major customers) of its current CEO.”

Elliott’s case for ousting current board members was hurt by the departure of Kleinfeld, who until Monday was the hedge fund’s main target, said Josh Sullivan, an analyst at Seaport Global Securities. Arconic tumbled 6.7 percent $24.89 at 11:05 a.m. in New York, marking the biggest intraday decline since the shares began trading Nov. 2.

“The news wasn’t as clean an event as people were hoping for,” Sullivan said in an interview Tuesday. Still, it remains likely that Elliott’s nominees will be elected, he said.

Elliott Activity

Singer’s firm, founded in 1977, rarely focuses its activist ire on a specific executive, like it did with Kleinfeld. Elliott typically highlights its deep corporate research, complex legal threats, and a determination to stick with a fight until the win.

Kleinfeld’s departure adds a high-profile victory to an early start for the fund, which oversees about $33 billion of assets. In just the first few months of this year, Elliott has targeted BHP Billiton Ltd., the world’s biggest mining group, for unprecedented overhauls. It’s pressured Dutch paintmaker Akzo Nobel NV to embrace a takeover bid from rival PPG Industries Inc. or face a shareholder referendum on its chairman.

It’s also nudged health-care research group Advisory Board Co. to mull a sale and pushed for board overhauls at tech outsourcing giant Cognizant Technology Solutions Corp. and power producer NRG Energy Inc.

For proof of how aggressive Elliott can be, even by hedge-fund standards, turn to Argentina. Singer’s firm is probably most well known for a battle with the country’s government over the 2001 bond default. Argentina settled last year, and Elliott got paid.

‘First Step’

At Arconic, Elliott called Kleinfeld’s departure “a necessary first step” and turned its attention to the board for defending his leadership. Elliott has been pushing for Larry Lawson, former CEO of Spirit AeroSystems Holdings Inc., to run Arconic.

The fund said it would continue a fight to replace Arconic directors at next month’s annual meeting because shareholders can’t trust the board. Kleinfeld’s letter contained “a threat to intimidate or extort” an Elliott senior officer based on “false insinuations,” the hedge fund said in a statement.

Arconic on Monday questioned why Elliott was persisting with its proxy fight after it achieved its main objectives: the split of Alcoa into a commodity company and a parts maker, plus the departure of Kleinfeld. While Arconic didn’t disclose the contents of the letter, it stressed that its agreement to let the CEO go wasn’t made in response to the proxy fight or Elliott’s criticisms of the company’s strategy, leadership or performance.

Still, the manufacturer has proposed board and by-law changes, saying it will seek approval to make all directors subject to annual elections, eliminate a super-majority vote and give eligible shareholders a proxy access mechanism to nominate candidates.

Interim CEO

Arconic appointed an interim CEO, David Hess, who was named to the board last month and who is a former president of United Technologies Corp.’s Pratt & Whitney jet-engines unit. During his tenure, Pratt won the sole-source role powering the F-35 fighter jet and continued to develop the geared turbofan engine that now powers some narrow-body commercial planes.

Lead director Patricia Russo will take over as Arconic’s interim board chair.

Elliott has previously questioned professional conflicts in Kleinfeld’s relationship with Russo -- with whom he also sits on the Hewlett Packard Enterprise Co. Board. Their respective directorships meant “each is responsible for setting the other’s pay and compensation,” Elliott said March 20.

Elliott Allies

First Pacific Advisors Inc., Arconic’s fourth-largest shareholder with a 4.7 percent stake, said all long-serving directors should be removed.

“We hope to see the Elliott nominees elected and Larry Lawson appointed CEO,” Brian Selmo, a First Pacific partner, said by telephone.

Another Arconic shareholder, Orbis Investment Management Ltd., said the board had demonstrated a “pattern of poor judgment and intolerable behavior that can’t be redeemed by their reluctant decision to finally remove Klaus Kleinfeld.”

Compensation Impact

At Siemens, Kleinfeld resigned after less than three years as CEO after a probe into whether some employees used slush funds to bribe customers. Siemens was forced to review more than 420 million euros of payments, and Chairman Heinrich von Pierer resigned. That amount would be valued at $447 million at current exchange rates.

By electing to resign from Arconic, Kleinfeld might have lost out on $11.2 million in severance and other benefits he’d be entitled to if the board had let him go without cause, according to a regulatory filing. The filing didn’t specify how a voluntary exit would affect the ex-CEO’s unvested equity awards, worth about $19.6 million as of Dec. 31.

Kleinfeld is a globe trotter who attends the World Economic Forum in Davos, Switzerland, and the Opening Gala of the New York Metropolitan Opera. He attended the first meeting of Trump’s manufacturing council at the White House in January and missed the second.

Arconic had $12.4 billion in revenue last year and counts Airbus SE and Boeing Co. as major customers. Arconic in turn is the biggest buyer of Alcoa’s metals, accounting for about 10 percent of Alcoa sales, according to data compiled by Bloomberg.

The company’s annual meeting is scheduled for May 16 -- leaving almost a month before the shareholder vote.

— With assistance by Rick Clough

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