Sunday, December 7, 2014

Activist Investors Vs. The Timkens

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.

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