Arconic, hedge fund fight for seats

Elliott seeks shakeup in bitter proxy battle

Less than a week remains for Arconic and activist hedge fund Elliott Management to win the hearts and minds of investors, who will decide the fate of the specialty metal parts producer at Arconic’s shareholder meeting May 25.

Much more than five seats on Arconic’s board of directors are at stake in a bitter proxy contest that has seen Elliott already claim victory on one front: the departure of chairman and CEO Klaus Kleinfeld. The feud has elevated concern among Arconic employees, including about 1,800 in Western Pennsylvania, who could face major changes if the $32 billion hedge fund with a track record for getting its way claims another victim.

Arconic portrays Elliott as a short-term investor “seeking extraordinary influence through questionable tactics,” according to materials the company sent to shareholders this week.

Elliott, which controls about 13 percent of Arconic’s stock, insists Arconic is an underperforming company in need of a drastic makeover.

The fight has been waged through a barrage of press statements, glossy materials mailed to shareholders, and print and online ads. Elliott went to the expense of stating its case in a high resolution video board sent to shareholders that included controls to stop and start the video and raise or lower the volume.

A lot has happened since January when Elliott informed Arconic it wanted to replace Mr. Kleinfeld with former Spirit AeroSystems CEO Larry Lawson.

Arconic stood by Mr. Kleinfeld and his strategy until last month, when the CEO abruptly stepped

down over a letter he sent to Paul Singer, the hedge fund’s founder. Mr. Kleinfeld didn’t consult with Arconic’s board before sending the letter, in which Mr. Kleinfeld hinted that Mr. Singer’s behavior at the 2006 FIFA World Championship soccer match has “strong potential to become lastingly legendary.”

Arconic said the letter was ill-advised. Elliott said it was a “warped initiative” that attempted to extort or intimidate Mr. Singer.

Mr. Kleinfeld’s departure did not cause Elliott to back down.

It is going ahead with its effort to oust four Arconic directors who are up for election at next week’s shareholder meeting and replace them with four of its own nominees.

The fifth board seat belongs to Ulrich Schmidt, another former Spirit AeroSystems executive. He and two other Elliott nominees were placed on Alcoa’s board last year as a result of pressure Elliott placed on the aluminum producer to improve its performance.

Mr. Schmidt became an Arconic director in November when Alcoa separated its mining, refining and smelting business from its downstream business that make specialty metal components for the aerospace, transportation and other markets.

The aluminum business retained the Alcoa name and the downstream businesses make up Arconic.

The United Steelworkers union, which represents about 4,700 Arconic employees, is backing the company. It accuses Elliott of trying to engineer a short-term stock price increase at the long-term expense of the company.

Arconic also has won endorsements from four major customers: Boeing, Airbus, GE Aviation and United Technologies.

Two investors that each own more than 4 percent of Arconic’s stock. Orbis Investment Management and First Pacific Advisors, are backing Elliott. The hedge fund says it also has the support of two other shareholders, Lion Point Capital and Douglas Lane & Associates.

So is an influential firm that advises institutional shareholders on how to vote in proxy contests. Glass Lewis says Elliott “has identified a number of serious concerns” at Arconic.

“Elliott has highlighted a compelling case of underperformance and governance inadequacies that continue to be largely overlooked by the [Arconic] board,” Glass Lewis said in its report.

ISS, another proxy adviser, is supporting two of Elliott’s four board candidates.

Arconic shares have jumped 18 percent since Elliott announced its intentions in January. Glass Lewis believes the increase stems more from the hedge fund’s campaign than from Arconic’s improved performance.

The shares closed Thursday at $26.92, up 8 cents.