ST. LOUIS — D.E. Shaw, an activist hedge fund, released a letter Tuesday that urges Emerson’s board to cut costs, improve governance and break up the company.
Shaw, which says it owns more than 1% of Emerson, estimates that its proposals could boost Emerson’s share price by 50%, creating $20 billion in value.
The letter is harshly critical of Emerson’s executives and directors. It says the company has “a long track record of poor capital allocation” and adds that “management and the board have let shareholders down.”
Emerson responded with a statement defending its “strong track record of operational excellence and actions to enhance shareholder value.” It noted that on Oct. 1, the company launched a comprehensive review of operations, capital allocation and its business portfolio.
Analysts have said the review could lead to a decision to split Emerson in two.
Emerson’s statement Tuesday quotes Clemens Boersig, the board’s lead independent director, as saying Emerson “maintains an open dialogue with all shareholders” and will “carefully evaluate D.E. Shaw’s proposals as we continue to assess value-creation opportunities.”
D.E. Shaw’s letter notes that Emerson’s shares have underperformed the Standard & Poor’s 500 index by 47% in the last five years, and have also underperformed a group of peer companies identified by Emerson.
D.E. Shaw calls Emerson’s corporate costs “inefficient and unjustified,” noting that the company maintains a fleet of eight jets and one helicopter “at great expense to shareholders.” It says the company could save $1 billion a year through efficiency moves.
The letter urges Emerson to spin off its climate-control business, which makes commercial cooling equipment and compressors for air conditioners, as a separate company, a move that other analysts also have suggested.
The spinoff alone could boost Emerson’s share price by 20%, the letter says. It adds that Emerson’s current conglomerate structure “has prevented each business from achieving its full potential.”
D.E. Shaw also leveled criticism at Emerson’s executive pay practices. It said Chief Executive David Farr’s compensation, which totals $150 million in the last 10 years, is nearly double what the CEO of competitor Rockwell Automation earns, “despite substantially worse performance” by Emerson.
The letter also urges Emerson’s board to require all directors to stand for election annually, as is the practice at a majority of large companies. Emerson’s directors serve staggered three-year terms, a practice Shaw refers to as a “director protection program.”
Emerson, based in Ferguson, is the St. Louis area’s second-largest public company, with 2018 revenue of $17.4 billion.
Emerson’s shares were up 1.5% at midmorning Tuesday.