Special strategy committee concluded it would take longer than originally thought to create value as an integrated company
In a major victory for shareholder activism, the Timken Company’s board of directors approved a plan on September 5 to spin off its steel business from its bearings and power transmission (B&PT) business and create two separate publicly traded companies.
The decision comes four months after a shareholder vote at Timken’s May 7 annual meeting supporting a proposal sponsored by the California State Teachers Retirement System (CalSTRS) and Relational Investors to split the Canton, Ohio company in two in order to realize the full value of both its businesses. In its proposal, CalSTRS argued that despite favorable comparisons by both the steel and bearings businesses to peers when measured by return on invested capital, operating margins and revenue growth, ‘Timken’s valuation multiples are significantly discounted to peers in their respective industries.’
Timken expects the transaction to be tax-free to investors and to be completed within 12 months, with two distinct public companies operating by the start of the third quarter of 2014. The one-time separation cost is estimated at $125 million, pre-tax, company executives said on a call with investors held on September 6.
In its proxy materials sent to investors in April, Timken’s board urged shareholders to vote against CalSTRS’ proposal. After the vote, however, the company swiftly announced that the board would form an independent strategy committee to assess the value of splitting the company.
CalSTRS praised Timken’s decision in a statement on September 5 ‘because it means they’ve listened to their shareholders.’
‘We are grateful to the special strategy committee for its diligent work and to the entire Timken board for responding to the will and long-term interests that Timken’s shareholders expressed at the annual meeting,’ CalSTRS’ director of corporate governance, Anne Sheehan, said.
Once the strategy committee was established, ‘board members had extensive meetings with shareholders [and advisors and customers] and it became clear that it would take far longer to create value as an integrated enterprise than we originally thought,’ Timken chairman and CEO James Griffith said during the call with investors.
‘A proxy fight like this frankly forces you to re-examine dogma,’ says Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware’s business school. ‘The longer you’ve been around, the more you accept things the way they are. Today, investors don’t want you to just accept things the way they are. They want you to justify.’
While forming a special committee was part of CalSTRS’ proposal, Elson sees splitting a company as a significant business decision better made by the entire board.
‘To delegate to a special committee would be a little unusual unless there were conflicts of interest with some board members,’ he says.
At the time of separation, Griffith will retire from Timken and Richard Kyle is expected to become president and CEO of the B&PT company, while John Timken, an active member of the board since 1986, will be named non-executive chairman. Ward Timken, Jr. is expected to lead the new steel company as chairman and CEO.
Asked during the investors call whether the new steel company would consider splitting the CEO and chairman duties as the new B&PT company plans to do, Ward Timken said the governance of the new companies, including how the board members will be divided, will be defined in the next 30 to 60 days.
‘Determining key skill gaps that may result from that division of board members and the ultimate composition of the steel company’s board will be disclosed in the future,’ he said.
One clear lesson from Timken’s experience is that companies ‘have to engage their investors on a thoughtful and continual basis,’ says Elson.
Although he applauds Timken’s board for reacting appropriately to investors’ concerns, he says ‘it would have been a lot better if they had done this on their own years ago rather than going through the dislocations that this process created.’
In appointing the new boards, Elson emphasizes how critical it is to ‘get the governance right because it was a governance dispute that started this whole brouhaha. Get it right so you’re more in tune with your investors so you can act proactively rather than reactively.’