Letter and other materials available at NewArconic.com
Elliott Management Sends Letter to Fellow Arconic Shareholders
Elliott Management Corporation (“Elliott”), which manages funds that collectively beneficially own 10.5% (12.1% economic ownership) of the common stock and equivalents of Arconic, Inc. (NYSE: ARNC) (“Arconic” or the “Company”), today released a letter to shareholders sharing further thoughts on the need for fundamental change at Arconic.
The letter and other materials can be viewed at NewArconic.com.
Full text of the letter follows:
February 1, 2017
Dear Fellow Shareholder:
I am writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (collectively, “Elliott” or “we”), which together own a greater than 12.1% economic interest in Arconic, Inc. (“Arconic” or the “Company”), making us the Company’s largest shareholder.
Arconic operates a world-class collection of assets that, if managed properly, with prudent reinvestment of capital, should produce substantial returns for its shareholder owners. However, current management’s persistent failure at these tasks for nearly a decade has destroyed considerable shareholder value. We believe a change of leadership is required to improve performance at Arconic today.
As a result, we have identified and are submitting for election at the Company’s 2017 Annual Meeting a slate of independent, highly qualified nominees (the “Shareholder Nominees”) to join Arconic’s board. The Shareholder Nominees each bring substantial expertise and deep experience, and they were selected specifically for their ability to empower the current Board to act on the enormous value-creation opportunity present at Arconic today.
In addition, we have engaged former Spirit AeroSystems, Inc. CEO Larry Lawson as a consultant and believe that Mr. Lawson has the ideal set of skills needed to lead a turnaround of Arconic’s woefully underperforming business. We believe that improving Arconic’s performance could result in a share price of at least $33-$54 per share, representing a shareholder value realization opportunity of at least 43%-135%.
The purpose of this letter is to:
For more than a year, Elliott has engaged in private discussions with the Company regarding the numerous ways in which Arconic could effectively execute its business separation, improve operational performance, enhance investor communications, and establish improved corporate governance practices. Our fervent hope was to avoid a public discussion. However, such a discussion has become unavoidable, principally because the Company believes its current Chairman and CEO, Klaus Kleinfeld, is the leader best suited to achieve the realization of Arconic’s considerable underlying value.
We disagree. We believe fundamental change is needed, and the election of the Shareholder Nominees to the Company’s Board is necessary to catalyze such a change. Moreover, we believe that Mr. Lawson’s track record of operational excellence, extensive experience, and successful record of driving change is perfectly suited to the current opportunity at Arconic, and that it will be brought to bear in ways that we believe will benefit all long-term stakeholders.
Elliott is an investment firm founded in 1977 that today manages approximately $31 billion of capital for both institutional and individual investors. Elliott is a multi-strategy firm active in debt, equities, commodities, currencies, and various other asset classes across a range of industries. Active equity investing is one of the firm’s core strengths, and Elliott’s approach to each such investment is based on extensive diligence, constructive engagement, and a strong preference for collaborative solutions. Elliott has a strong, long-term track record of working with companies in a variety of sectors to create long-term fundamental stakeholder value.
Our investment in Arconic is substantial, and we have performed extensive due diligence on the Company for well more than a year. We have spent many hundreds or thousands of hours speaking to innumerable independent experts, competitors of each business unit, customers, former employees, Wall Street analysts, and institutional investors.
Elliott prides itself on a culture of not only reaching conclusions with an open mind following exhaustive research and analysis, but also repeatedly challenging and re-challenging those conclusions, working through “how we might be wrong.” After all our efforts, after listening to the Company’s vision as set forth at the Investor Day and on recent earnings calls, and after multiple meetings with management, our resulting conclusion is clear and unambiguous: immediate change in leadership is needed for Arconic to reliably and sustainably create shareholder value.
The Case for Change at Arconic
Prolonged disappointing operating results combined with the irreparably damaged credibility of Arconic’s current management have created a circumstance whereby Arconic will never approach its potential under the current CEO. We have grouped the problems into the following three categories:
1) Profound and Persistent Underperformance
2) Operational, Strategic, and Communication Failures
3) Corporate Governance and Executive Alignment
The following objective facts speak for themselves.
1) Profound and Persistent Underperformance:
Since Dr. Kleinfeld became the CEO of Alcoa in May 2008 and through the Alcoa/Arconic split (5/1/2008 – 10/31/2016):
1 TSR for 2016: 1/1/2016-10/31/2016, the day before Alcoa and Arconic split. TSR for 2008: 5/1/2008 - 12/31/2008. Peer Proxy is Alcoa’s 2016 self-selected proxy peers: 3M CO, CUMMINS INC, DANAHER CORP, DEERE & CO, EATON CORP PLC, EMERSON ELECTRIC CO, GENERAL DYNAMICS CORP, L3 TECHNOLOGIES INC, NORTHROP GRUMMAN CORP, RAYTHEON COMPANY, DU PONT (E.I.) DE NEMOURS, DOW CHEMICAL CO/THE, FREEPORT-MCMORAN INC, HUNTSMAN CORP, INTERNATIONAL PAPER CO, PPG INDUSTRIES INC, NEWMONT MINING CORP, NUCOR CORP, UNITED STATES STEEL CORP, LYONDELLBASELL INDU-CL A.
These poor results cannot be excused by the performance of aluminum. Since Dr. Kleinfeld became the CEO of Alcoa in May 2008 and through the Alcoa/Arconic split (5/1/2008 – 10/31/2016):
2) Operational, Strategic, and Communication Failures:
Returns and Capital Allocation
Revenue and EBITDA Growth (vs. Targets)
3) Corporate Governance and Executive Alignment:
Layered on top of these performance issues and fueling the erosion of management’s credibility is a long history of unfulfilled promises and grandiose rhetoric. Read in isolation, Dr. Kleinfeld’s earnings transcripts depict a Company that has not only performed well, but also is poised to do even better. The consistent and growing disconnect between Dr. Kleinfeld’s rhetoric and the reality of the business’s performance adds to our and other shareholders’ serious concerns about management’s judgment and grasp of the business. Does management understand that performance has been exceptionally poor? Does management think shareholders don’t see and understand that performance has been exceptionally poor? We have spoken with numerous shareholders, analysts, former employees and competitors. In short, we believe that current management’s credibility with its stakeholders is damaged beyond repair.
We want what is best for Arconic’s shareholders and its employees. Our goal in airing these many failings is not to dwell on the past, but to make clear that the need for change is urgent. We have taken the step of nominating new independent directors because we are concerned that the Board appears to believe that it owes Dr. Kleinfeld “at least a chance” to lead the new Arconic into the future, now that the split has been effectuated and the operations of the Company have been reconfigured in manner that will better promote performance improvement and success.
Nothing could be more wrong – the duties this Board owes are to its shareholders and to the ~40,000 employees who deserve competent leadership. None of Dr. Kleinfeld’s excuses for the poor performance outlined above withstands scrutiny, and the opportunity for value creation today is too great to ignore.
The Opportunity at Arconic
We believe value opportunity at Arconic is meaningful and achievable through business improvements and/or strategic options across the entire Company. In the EPS business, the Company can and should focus on narrowing the margin gap with Precision Castparts. Our diligence indicates there is no structural reason for this gap to exist. There is a similar opportunity to achieve real margin improvements in the GRP business, as well as to dramatically reduce corporate overhead. The Company also has an opportunity to allocate capital away from wasteful projects and towards more practical growth strategies. Finally, the Company can and should take a cue from Alcoa Corp. by adopting widely-accepted best practices in the area of corporate governance, signaling to stakeholders that “New Arconic,” welcomes accountability.
Looking at each of these opportunities in turn:
Close the Margin Gap with Precision Castparts (“PCC’”):
Achieve Real Margin Improvement in GRP Business:
Reduce Corporate Overhead:
Implement Capital Allocation Discipline:
Modernize Corporate Governance:
Elliott’s targets are based on the mid-point of Arconic’s 2017 revenue guidance. Elliott believes that Arconic margins can be improved based on the size of the business today. In short, even without growth, and based on the application of an appropriate industry multiple, Arconic could be worth at least $33-$54 per share.
Larry Lawson Has the Skill Set and Operational Expertise to Turn Around Arconic
We believe that Mr. Lawson has the ideal set of skills needed to turn around Arconic’s woefully underperforming business, and that his appointment as Arconic’s CEO would serve to catalyze the kind of operational and cultural improvement opportunity outlined above. We have engaged Mr. Lawson as a consultant and are excited that an energetic operating executive with his superb track record and directly relevant experience has stepped forward.
During Mr. Lawson’s tenure as President, CEO and Director of Spirit AeroSystems Holdings Inc., the company outperformed the S&P 500 by an average of 34% per year. Furthermore, as CEO, Mr. Lawson gained a reputation as a “tough change agent with unrelenting demands on performance improvement” (Barclays, December 18, 2013). Mr. Lawson’s extensive executive leadership experience with multinational aerospace and manufacturing companies, where he gained significant knowledge relative to aircraft manufacturing, business development, engineering operations, international marketing and performance-based logistics, make him the right kind of candidate to lead a turnaround at Arconic.
Shareholder Nominees Bring Fresh Perspectives, Accountability to the Board
We believe that the five independent, highly qualified nominees we are putting forward today can empower the Board to correct the persistent undervaluation that is undeniably present at Arconic.2 As a shareholder, we are excited that individuals of this caliber have stepped forward:
Leaders of this caliber would be a welcome addition to the board of any company. At Arconic, they will also bring fresh perspectives and accountability.
2 Please note that if the Company renominates Ulrich Schmidt at the 2016 annual meeting, Elliott does not intend to seek his replacement.
Elliott Looks Forward to Introducing the Shareholder Nominees to Arconic’s Owners
The ideas set out above result from substantial diligence and analysis by Elliott and reflect our thoughts on the most promising path to maximize shareholder value. Our belief in the extraordinary potential of Arconic is demonstrated by the substantial investment we have made in the Company’s stock.
While this letter presents Elliott’s perspectives, the Shareholder Nominees will form their own, independent views on the Company, its assets, and its strategy. We look forward to introducing both the Shareholder Nominees and Mr. Lawson to you our fellow shareholders in the weeks and months ahead.
Senior Portfolio Manager
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
Elliott Associates, L.P. and Elliott International, L.P., together with the other participants named herein (collectively, “Elliott”), intend to file a preliminary proxy statement and accompanying proxy card with the Securities and Exchange Commission (“SEC”) to be used to solicit votes for the election of its slate of highly-qualified director nominees at the 2017 annual meeting of shareholders of Arconic Inc., a Pennsylvania corporation (the “Company”).
ELLIOTT STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’ PROXY SOLICITOR, OKAPI PARTNERS LLC, AT ITS TOLL-FREE NUMBER (877) 869-0171 OR VIA EMAIL AT INFO@OKAPIPARTNERS.COM.
The “Participants” in the proxy solicitation are Elliott Associates, L.P., a Delaware limited partnership (“Elliott Associates”), Elliott International, L.P., a Cayman Islands limited partnership (“Elliott International”), Paul E. Singer (“Singer”), Elliott Capital Advisors, L.P., a Delaware limited partnership (“Capital Advisors”), Elliott Special GP, LLC, a Delaware limited liability company (“Special GP”), Braxton Associates, Inc., a Delaware corporation (“Braxton”), Elliott Asset Management LLC, a Delaware limited liability company (“Asset Management”), Elliott International Capital Advisors Inc., a Delaware corporation (“EICA”), Hambledon, Inc., a Cayman Islands corporation (“Hambledon”), Elliott Management Corporation, a Delaware corporation (“EMC”), The Liverpool Limited Partnership, a Bermuda limited partnership (“Liverpool”), Liverpool Associates Ltd., a Bermuda company (“Liverpool Associates”), Larry A. Lawson, Christopher L. Ayers, Elmer L. Doty, Charles M. Hall, Bernd F. Kessler and Patrice E. Merrin.
As of the date hereof, Elliott Associates, Elliott International and their affiliates beneficially owns 45,902,133 shares of common stock, $1.00 par value per share, of the Company (the “Common Stock”), representing approximately 10.5% of the outstanding shares of Common Stock. As of the date hereof, Elliott Associates beneficially owns 14,688,682 shares of Common Stock (including 3,510,666 shares of Common Stock owned directly by Liverpool, a wholly-owned subsidiary of Elliott Associates), constituting approximately 3.3% of the shares of Common Stock outstanding, and Elliott International beneficially owns 31,213,451 shares of Common Stock, constituting approximately 7.1% of the shares of Common Stock outstanding. EICA, as the investment manager of Elliott International, may be deemed to beneficially own the 31,213,451 shares of Common Stock beneficially owned by Elliott International, constituting approximately 7.1% of the shares of Common Stock outstanding. As of the date hereof, Mr. Ayers beneficially owns 100 shares of Common Stock. As of the date hereof, none of Messrs. Lawson, Doty, Hall or Kessler or Ms. Merrin beneficially owns any shares of Common Stock.
In addition, (i) Singer, and Capital Advisors and Special GP, which are controlled by Singer, are the general partners of Elliott Associates and may all be deemed to beneficially own the shares of Common Stock held by Elliott Associates, (ii) Singer, Braxton and Asset Management are the general partners of Capital Advisors and may be deemed to beneficially own the shares of Common Stock held by Elliott Associates, (iii) Liverpool Partnership is a wholly-owned subsidiary of Elliott Associates, and Liverpool Associates is a wholly-owned subsidiary of Elliott Associates and is the sole general partner of Liverpool Partnership and may be deemed to beneficially own the shares of Common Stock held by Liverpool Partnership, and (iv) EICA, as investment manager of Elliott International, and Hambledon, which is also controlled by Singer, as the sole general partner of Elliott International, and Singer, may be deemed to beneficially own the shares of Common Stock held by Elliott International. EMC provides management services to Elliott Associates, Elliott International and their affiliates.
Elliott Associates, through Liverpool, and Elliott International have entered into notional principal amount derivative agreements (the “Derivative Agreements”) in the form of cash settled swaps with respect to 2,324,005 and 4,938,512 shares of Common Stock, respectively (representing economic exposure comparable to less than 1% and approximately 1.1% of the shares of Common Stock of the Company, respectively). Collectively, the Derivative Agreements held by such parties represent economic exposure comparable to an interest in approximately 1.7% of the shares of Common Stock. The Derivative Agreements provide Elliott Associates and Elliott International with economic results that are comparable to the economic results of ownership but do not provide them with the power to vote or direct the voting or dispose of or direct the disposition of the shares that are referenced in the Derivative Agreements (such shares, the “Subject Shares”). Each of Elliott Associates, Elliott International and their affiliates disclaim beneficial ownership in the Subject Shares.
Elliott Management Corporation manages two multi-strategy hedge funds which combined have approximately $31 billion of assets under management. Its flagship fund, Elliott Associates, L.P., was founded in 1977, making it one of the oldest hedge funds under continuous management. The Elliott funds’ investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm.
Elliott Management Corporation
Stephen Spruiell, 212-478-2017