The New York Times has
an interesting profile of the division of Timken into separate bearing and steel businesses:
Crunching reams of data in search of undervalued stocks, analysts at
Relational Investors, a firm that manages $6 billion mostly on behalf of pension funds, happened upon a Canton company called
Timken, which was in the unglamorous business of making steel and bearings. Controlled by the
Timken
family for more than a century, the company looked cheap compared with
its industrial peers, at least according to Relational’s analysis. A few
more calculations suggested that Timken’s shares might fetch more if
the company were split in two....
The
heart of the Calstrs/Relational argument was that the two companies
should trade as pure plays, with investors deciding for themselves
whether to bet on the faster-growing but more volatile steel business or
the more mature but highly profitable bearing business.
Timken
executives fought back, making the case for keeping bearings and steel
under one roof. Bearings require specialized steel that can, for
example, withstand enormous pressure deep underwater in an offshore oil
well. The metallurgical expertise the steel unit acquired in creating
these advanced materials, they said, translated into products for other
customers like medical device makers and drillers.
There
were other structural reasons for the two companies to stay together.
Because the steel business can be very profitable but is much more
volatile, the bearings division served as ballast for the combined
company. Excess cash from the bearing side smoothed out those peaks and
valleys and helped pay for big investments like the huge caster.
But
Mr. Larrieu and Relational maintained that if the money couldn’t be
invested in the business now or in the foreseeable future, it should be
returned to shareholders, who are, after all, the owners of the company...
Although
Mr. Timken is on the board of the new bearing company, its chief
executive is not a family member. And the new management seems to be
hewing more closely to the activists’ playbook.
Buried in a
November Timken investor presentation
is a chart bound to please Wall Street. Titled “Yesterday and
Tomorrow,” it sketches how capital was allocated before the split, and
how it will be used now. Pension fund contributions drop from nearly a
third of cash flow to near zero, while capital spending is roughly
halved. And instead of using 12 percent of cash flow to buy back stock,
share repurchases will consume nearly half of cash flow over the next 18
months. In other words, less cash is being invested in the business or
earmarked for benefits to employees, and more money is going to
investors. While TimkenSteel’s board has authorized a three million
share buyback by the end of 2016, Timken has plans to repurchase 10
million shares by the end of next year.
Even
if TimkenSteel and Timken manage to avoid a takeover for the time
being, the separation is likely to make both firms more vulnerable over
time, said Suzanne Berger, a professor of political science at M.I.T.
who researches globalization, innovation and production.
Not
only will they both be less financially nimble than before, she said,
the steel maker in particular will lack the scale to invest and innovate
the way it could under the old corporate structure. Foreign steel
makers in Asia and Europe are vastly larger, and face much less pressure
for short-term results, enabling them to pour more money back into
their businesses.
“In
the microcosm of Timken, you can see the larger forces playing out in
manufacturing in America,” said Ms. Berger, who studied the company for a
2013 book she wrote, “Making in America.” “It’s not classic greed, like
‘Barbarians at the Gate.’ But we’ve set up financial markets in a way
that’s injurious to long-term investment and industrial companies.”
“We’ve
got a financial system in the U.S.,” she said, “where California
teachers have to protect their pension funds by hurting manufacturing in
Ohio.”
Goddamned MBAs and the "
world's dumbest idea," the belief that corporations' only goal should be to maximize shareholder value, have ruined our country's economy. The Timkens have run their business the right way, and a bunch of outsiders looking for an easy score have come in and fucked everything up. Just reading about the plans for the bearing company lead me to believe that it will be a shell of itself in the not-too-distant future. It's also telling that Ward Timken decided to stay on the steel side of the business. The fact that the outside investors didn't understand the obvious connection between the steel business and the bearing business makes me think they don't know their asses from a hole in the ground. If you want to know why our manufacturing economy has been dismantled in the past 40 years, you don't have to look beyond this story. As much as I wish that more American workers had pensions to rely on, it is the financial decisions made by giant pension funds that are at the heart of the rise of the belief in maximizing shareholder value. That has been terrible.