It seems like a simple-enough question: Should Timken Co. be split into two companies? The company and investors agree on one issue: Timken’s shares are undervalued. But they disagree on what steps should be taken to increase the value. Tuesday morning, when Timken directors conduct the annual shareholders meeting, the people, institutions, pension plans and investment groups that own shares will have their say.
It seems like a simple-enough question: Should Timken Co. be split into two companies?
One would make steel. One would make bearings.
Relational Investors and CalSTRS, investors holding about 7.3 percent of Timken’s stock, have posed the question. Company shareholders are being asked to answer.
The question has been kicked around publicly since November. It has been discussed privately by the two sides since last May.
Timken management contends the idea has been pondered — and dismissed — many times in recent years.
The company and investors agree on one issue: Timken’s shares are undervalued.
But they disagree on what steps should be taken to increase the value.
Tuesday morning, when Timken directors conduct the annual shareholders meeting, the people, institutions, pension plans and investment groups that own shares will have their say.
But the outcome of Tuesday’s vote doesn’t mean the contest is over or that the issue has been resolved.
Timken formed in 1899 and moved its operations to Canton in 1901. The company began making steel in 1915 to assure its supply of seamless tubing. Steel business sales now are about $2 billion per year, or about 40 percent of total sales. The company uses about 10 percent of the steel it makes, with the majority sold to other companies. Timken family members have been involved from the company’s founding, with Ward J. “Tim” Timken Jr. representing the fifth generation to lead the company.
Relational Investors is a privately held asset management firm organized by partners Ralph W. Whitworth and David H. Batchelder in 1996. Whitworth is known in some circles as an activist investor because after buying stock in a company he tends to push for changes. He currently is a Hewlett-Packard Co. director.
CalSTRS is the world’s largest educator-only pension fund with a portfolio valued at $163.7 billion.
TIMKEN’S PLAN: WHY NOT TO SPLIT
• President and CEO James Griffith said the company has reviewed the possible separation of the steel business multiple times since he took the helm late in 1999. After each study, managers and directors have decided against spinning off the steel business. They have been urging shareholders to vote against the proposal.
• The steel business provides an internal source of material used to make Timken bearings. The company has control of the raw material supply, which improves quality and drives shorter lead times. Customers value Timken’s reliability, which leads to increased demand and higher margins.
• Bearing and steel researchers work together and have helped the company develop a core knowledge on power transmission, metallurgy and load and stress analysis.
INVESTORS’ PLAN: WHY SPLIT
• Relational and CalSTRS contend Timken stock is undervalued because of wide divergence between a bearing business and a steel maker. Bearings are an industrial product, while steel is a material product. Management would be in a better position to manage the different businesses if they operated independently.
Page 2 of 2 - • Splitting the business will drive share values higher, which has happened with other companies that have spun off operations. The investors suggest Timken share price will climb toward $70 per share.
• Separating the business won’t disrupt Timken operations, employees or the community. Investors contend that creating two Timken companies could lead to more management jobs.
WHAT COULD HAPPEN?
• The proposal is a recommendation. Passage of the proposal doesn’t require Timken to spin off the steel business.
• The investors propose the company “act expeditiously, consistent with effective tax considerations, to engage an investment banking firm to effectuate a spin-off of Timken’s steel business segment into a separately traded public company.”
• The Timken family and the company’s pension plan holds about 20 percent of the stock. Those shares are pledged to vote against the proposal. Roughly 5 percent of the shares are held by local residents and the company expects support from those shareholders.
• Relational and CalSTRS hold about 7.3 percent of Timken’s stock. Most of those shares — about 6.9 percent of Timken’s total shares — belong to Relational.
• That leaves institutional investors — pension plans and mutual funds, for example — holding about 67 percent of Timken’s stock. Those shares will decide the vote.
• If shareholders support the proposal, but Timken directors don’t follow the recommendation, it’s possible that Relational will try to unseat the board next year.
THE RESULTS SO FAR
• Relational contends its shareholders support the proposal. They point out that Timken’s stock began a steady climb after the proposal became public in November. The stock price jumped more than $5 per share the day of the announcement and has been as high as $58.50 and remained above $50 since January.
• Timken points out that its shares have traded above $50 per share before. Since January 2011, Timken stock has traded above $50 per share on two other occasions and that the current value is on par with past pricing.
• Two proxy advisory groups — Glass, Lewis & Co. and Institutional Shareholder Services — recommend that shareholders support the proposal by Relational and CalSTRS.
• Egan-Jones, also a proxy advisory group, recommends shareholders side with Timken.
• The company and the investors both have lined up investors and analysts who support their case.