NEW YORK (Reuters Breakingviews) - Arconic's board can at least thank Klaus Kleinfeld for a brief reprieve. The chairman and chief executive of the Alcoa spinoff which makes specialty parts for cars and airplanes was shown the door for inappropriately contacting an activist shareholder. That saves Arconic's directors from having to fire him. But they will still have to answer for why they didn't do that long ago.
Over the past nine years running Alcoa and then Arconic, Kleinfeld has been a poor steward of investors' booty. The company suffered for years from industry overcapacity and a sharp drop in aluminum prices. Kleinfeld expanded into engineered parts with high-priced acquisitions. Last November he split the outfit, leaving behind the legacy aluminum business under the Alcoa name and taking charge of newly named Arconic.
News of his exit won a $400 million applause from the market on Monday, which boosted Arconic's capitalization to $11.8 billion. But that barely begins to compensate for the nearly $16 billion in value that Alcoa lost on his watch.
Nor did changing names alter Arconic's fortunes. The firm had an operating margin of just 6.6 percent last year, more than four points below the sector average. Its engineered-products division has generated EBITDA margins about 7 percentage points below those of rival Precision Castparts before that company was bought by Berkshire Hathaway last year. And net debt of 3.25 times EBITDA is more than double the sector average, weighing on the company in a rising interest-rate environment.
Elliott Management, the hedge fund that won three board seats last year, is pressing for four more nominees and a strategy overhaul to ditch Arconic's costly New York headquarters, slash middle management and focus investment on high-return businesses. Such changes would enable the company to boost EBITDA margins to 20 percent in 2020 from a forecast 16.5 percent this year, it contends.
Although it dismissed Kleinfeld for “poor judgment” in contacting Elliott without authorization, the company reaffirmed its support of his strategy. It also suggested that Elliott should drop its “highly disruptive and distracting proxy fight” now that Kleinfeld, its main target, is gone. But with Kleinfeld's strategy in place – and a history of supporting their flawed CEO – directors are still in Elliott's crosshairs.
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