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Arconic CEO Resigns After 'Unauthorized' Letter To Hedge Fund

Arconic CEO Resigns After 'Unauthorized' Letter To Hedge Fund

Shares of Arconic Inc (NYSE: ARNC) were trading down Tuesday after an initially positive market reaction to the departure of CEO Klaus Kleinfeld.

Kleinfeld resigned Monday after sending an unauthorized letter to activist stakeholder Elliott Management, according to Arconic’s announcement of his departure.

The hedge fund, which by its own account has a 13.2 percent stake in Arconic, has pushed for a management change and board turnover at the light metals manufacturer.

Arconic, an aluminum fabricator, is the product of a company split in 2016, when the 128-year-old Alcoa Corp (NYSE: AA) was spun off as a mining, refining, smelting and power business. Kleinfeld, 59, was Alcoa’s CEO from 2008 until the company split in 2016, according to his corporate bio.

‘A Surprising And Positive Move’

Arconic’s board has lost credibility, Deutsche Bank analyst Jorge Beristain said in a note, adding that Kleinfeld’s exit is a “surprising and positive move.”

Elliott Management’s proxy fight has brought attention to “lapses in judgment” at Arconic, including non-disclosed vote lock-up agreements and a $500 million poison pill, Beristain said.

It’s increasingly likely that Arconic’s next CEO will be Elliott Management’s preferred candidate, former Spirit AeroSystems Holdings, Inc. (NYSE: SPR) CEO Larry Lawson, Beristain said. Lawson, 56, has a reputation as a turnaround executive, the Deutsche analyst said in Tuesday’s note.

“Our read-thru is Dr. Kleinfeld’s decision clears roadblocks and more departures will follow,” Beristain said.

Deutsche Bank has a Buy rating and $32 price target on Arconic.

Proxy Fight Comes To A Head In May

Kleinfeld’s exit was not due to his performance or Elliott Management’s criticisms of Arconic, according to a statement by interim Arconic CEO David P. Hess and interim board chairwoman Patricia Russo.

Kleinfeld’s letter to a senior officer at Elliott Management was sent without board approval and “showed poor judgment,” Hess and Russo said.

Arconic has now seen both its C-suite and seven of its 12 board seats turn over since the beginning of 2016, according to the company.

Arconic will hold a board election at its May 16 annual meeting, where Elliott Management intends to nominate four candidates, according to Arconic’s proxy statement.

“It is Elliott Management’s decision whether to continue to burden Arconic and its shareholders with its highly disruptive and distracting proxy fight, or to support Arconic in facilitating an effective CEO search and a strong transition,” Hess and Russo said.

Elliott Management said in a statement that Kleinfeld’s letter “read as a threat to intimidate or extort a senior officer” of the hedge fund and was “based on completely false insinuations.”

The hedge fund said Kleinfeld’s resignation was “long-overdue” and called the Arconic board an “obstacle” to the company reaching its potential.

“We intend to pursue our campaign for fundamental board-level change as vigorously as ever,” Elliott Management said in its statement.

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Latest Ratings for AA

Jun 2020Morgan StanleyMaintainsEqual-Weight
Jun 2020CitigroupMaintainsNeutral
Jun 2020Deutsche BankDowngradesBuyHold

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