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In May 2013 shareholders voted to break up the Timken Companya $5 billion Ohio manufacturer of tapered bearings, power transmissions, gears, and specialty steelinto two separate businesses. Their goal was to raise stock prices. The company, which makes complex and difficult products that cannot be easily outsourced, employs 20,000 people in the United States, China, and Romania. Ward Tim Timken, Jr., the Timken chairman whose family founded the business more than a hundred years ago, and James Griffith, Timkens CEO, opposed the move.
The shareholders who supported the breakup hardly looked like the barbarians at the gate who forced the 1988 leveraged buyout of RJR Nabisco. This time the attack came from the California State Teachers Retirement System pension fund, the second-largest public pension fund in the United States, together with Relational Investors LLC, an asset management firm. And Tim Timken was not, like the RJR Nabisco CEO, eagerly pursuing the breakup to raise his own take. But beneath these differences are the same financial pressures that have shaped corporate structure for thirty years.
Urging Timken shareholders to vote for the split, Relational Investors argued that they should want pure-play companies, focused on a single industrial activity. Investors would then be free to balance their portfolios by selecting businesses in industrial sectors with varying degrees of risk and sensitivity to different phases of economic cycles. A firm such as Timkenabout one-third a steel company (a materials play) and about two-thirds a bearings and power transmission business (an industrial components play)would lock investors into a mix that, Relational Investors claimed, leads to a discount on share price.
Timken management argued that making both materials and products enabled them to bring to market higher-quality goods that met customers needs: for example, their ultra-large bearings for windmill towers, which measure two meters in diameter, weigh four tons, and have to stand up to extreme wind and temperature conditions. Controlling the entire value chain, they said, allowed them to fine-tune the attributes of the steel in order to make superior products. Nonetheless, the financial calculation about how to maximize quarterly returns won out.
How Finance Gutted Manufacturing | Boston Review
As it usually does.