By Bob Tita and David Benoit
The abrupt departure of Klaus Kleinfeld as Arconic Inc.'s chief
executive officer this week opens a new chapter in the battle over
leadership at the aerospace and auto parts supplier -- and gives
next month's board election added urgency.
David Hess, who was appointed as interim CEO on Monday, is a
candidate for director but hasn't indicated whether he wants the
top job.
But Elliott Management Corp., the activist hedge fund behind the
monthslong campaign to oust Mr. Kleinfeld, is already pushing its
own choice: Larry Lawson, a onetime chief executive at aerospace
supplier Spirit AeroSystems Holdings Inc. who also held senior
roles at Lockheed Martin Corp. In addition, Elliott is seeking four
board seats, on top of the three directors it suggested last
year.
The stakes are high as Arconic is a key part of the global
aerospace supply chain, with Airbus SE and Boeing Co. forecasting
demand over the next 20 years for more than 33,000 new jetliners
valued at more than $5 trillion. Most will include parts made from
Arconic's aluminum and specialized metals, but jet makers are
pushing suppliers to cut prices.
With the CEO role unsettled, Arconic shareholders on May 16 will
likely be selecting the board members in charge of picking the
company's next leader. There are five seats out of 13 currently up
for election. Both slates of potential directors will likely argue
they have the trust and experience to make that selection, and the
result of the board election could shed light on who will win the
CEO post.
"The momentum [in the proxy contest] is still with Elliott,"
said Josh Sullivan, an analyst for Seaport Global Securities. "But
the board is in a better position now without Klaus. David Hess has
the skill set and he's relatively new to the board, so it's not
like the company's strategies are all his."
Mr. Hess, who was recruited by Mr. Kleinfeld, initially arrived
at Arconic last month as the proxy fight with Elliott was
intensifying. He has more than three decades of experience managing
aerospace businesses, including United Technologies Corp's. Pratt
& Whitney jet engine unit, a major Arconic customer.
Mr. Kleinfeld said during a recent interview before his ouster
that he had wanted Mr. Hess to join the board for years because of
his deep knowledge of the aerospace and metals industries, with a
record of shepherding long, difficult projects, including the
development of a new generation of Pratt jet engines.
In the short time left before the election, Mr. Hess, 61 years
old, will likely stay the course set out by the departed chief,
industry analysts say, by focusing on relationships with large
customers and developing new products for Arconic, which became a
stand-alone company after splitting from Alcoa Corp. late last
year. But Seaport's Mr. Sullivan predicted the board and Mr. Hess
will also try to distinguish themselves to shareholders. "He's
going to have to make some noise about his capabilities," he
said.
Mr. Hess wasn't available for an interview. Arconic said Elliott
will effectively control the CEO selection if its four candidates
are elected in addition to the three Elliott-recommended directors
already on the board. "We do not believe it is in shareholders'
interests for a single investor to nominate seven directors on a
13-person board," Arconic said in a written statement Wednesday,
after the story was published.
Mr. Lawson, age 58, has 37 years' experience in the aviation
industry, and is currently a consultant for Elliott. The hedge
fund's prescriptions for advancing shareholder interests are
focused on boosting margins, both through cost cuts and supplying
more complex and profitable parts.
Mr. Lawson is credited with turning around Spirit, which builds
fuselages and other parts for Boeing and Airbus. He reined in
spending and raised prices. From April 2013 to last July, when he
was CEO, the company logged a 132% return, while the S&P 500
returned about 50%.
But Mr. Lawson's practice of repeatedly raising prices at Spirit
attracted complaints from major customers. He renegotiated several
contracts that had left Spirit nursing big losses on some programs
to make parts for business jets. Industry analysts say his style
alienated some colleagues and customers, even though the strategies
helped expand margins in the short run. Arconic has said deploying
similar tactics with Arconic customers would undermine its
long-term supply agreements.
Spirit declined to comment about Mr. Lawson's time with the
company or his pricing strategies, releasing a statement that said
it "has no interest in or involvement with Elliott Management and
its dealings with Arconic."
Elliott didn't have any comment and also declined to make Mr.
Lawson available.
Both Messrs. Hess and Lawson have had missteps in the past,
notably in relation to building the F-35 Joint Strike Fighter.
Under Mr. Hess's watch, Pratt came under intense criticism from
Defense Department leaders for cost overruns and design problems
for the engine, though these have largely been resolved. Before
leading Spirit, Mr. Lawson managed the F-35 fighter jet program for
Lockheed Martin at a time when cost overruns forced the program to
be reset.
Although the selection of a CEO would ultimately be up to the
company's board, Elliott has stressed that Arconic's chief
executive should share what it says is Mr. Lawson's devotion to
creating shareholder value. Elliott and its backers have criticized
Arconic's structure under Mr. Kleinfeld for centralizing management
functions and discouraging profit-generating initiatives that don't
originate in the executive suite. Elliott has detailed a first-100
day plan that would include reorganizing the structure to identify
who in the organization is responsible for each line of profit.
Arconic reports first-quarter results on April 25.
--Doug Cameron contributed to this article.
Write to Bob Tita at robert.tita@wsj.com and David Benoit at
david.benoit@wsj.com
(END) Dow Jones Newswires
April 19, 2017 19:08 ET (23:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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