Manufacturers

D.E. Shaw Calls on Emerson to Cut Costs, Pursue a Split

D.E. Shaw Calls on Emerson to Cut Costs, Pursue a Split

ST. LOUIS and NEW YORK — The D. E. Shaw Group (“the Group”), which has been an investor in Emerson Electric Co. (“the Company”) for more than four years and currently holds a more than 1.0% interest in the common stock and equivalents of the Company, yesterday sent a letter to the Board of Directors of Emerson.

The negative report outlined ways the company has failed shareholders over the last decade, including what the hedge fund says is a history of poor capital allocation by the company under CEO David Farr.

Simply put, the Group believes that the management team and the board of Emerson have let shareholders down. D.E. Shaw said that “Emerson has been a perennial underperformer,” stemming from decisions made by the board and management. The Group called for change and chastized Emerson for overlooking its offer of assistance in creating more value for the company.

We have spent considerable time over the past two months outlining our concerns and proposed solutions in detail for the Board and management team. Rather than continue to engage with us in constructive, private dialogue, the Board appears instead to be laying the public groundwork for a full-throated defense of its indefensible track record.

Just days after we last met in person, the Board apparently thought it could neutralize our concerns and quell shareholder discontent by publicly announcing it would “study” Emerson’s issues. However, the announced effort – “evaluating” Emerson’s well known “operational, capital allocation and portfolio” issues – is obviously reactive to our analysis and years overdue. Furthermore, the announcement commits the Board to nothing, lacking any targets, deadlines or areas of focus.

In addition, the Company’s recent failure to correct the public record when it was suggested that the D. E. Shaw group had proposed a levered recapitalization of the Company – an action we have never suggested and something we have told you multiple times we do not think would be prudent – appears to be a clear effort to discredit our views and is a disservice to all your investors. The D. E. Shaw group is a large, long-term shareholder seeking for Emerson what we believe every shareholder wants: optimal allocation of capital, efficient operations, a sensible business configuration, governance that enshrines accountability, and executive compensation programs that properly align management with shareholders.

Rather than muddying the waters, we suggest instead Emerson acknowledge its shortcomings and commit to addressing them.

You can read the entire letter that D.E. Shaw Group sent to the Emerson Board of Directors here.

Here is Emerson’s response to the letter:

Emerson confirmed receipt of a letter to Emerson’s Board of Directors and presentation from D.E. Shaw.

Emerson has a strong track record of operational excellence and actions to enhance shareholder value. Since completing its repositioning in 2016, Emerson has grown both of its platforms at above market growth rates, increased its consolidated revenue at an 8% compounded annual growth rate, generated operating cash flow of more than $8 billion, and three-year TSR of 47%. Over the last five years, Emerson has divested over $6 billion in annual revenue, including Network Power, Control Techniques, and Leroy Somer. Emerson also has a long history of returning capital to shareholders, including $10 billion in share repurchases over the past 10 years and 62 consecutive years of dividend increases.

On Oct. 1, Emerson announced that it is conducting a comprehensive review of operational, capital allocation and portfolio initiatives to enhance shareholder value and position the Company for both near- and long-term success. The evaluation is being led by Emerson’s Board, supported by a leading consulting firm and legal and financial advisors.

Chairman and Chief Executive Officer David N. Farr said: “Emerson was one of the first industrial companies to address concerning trends in the macroeconomic environment, and we’ve announced increased restructuring actions since May to proactively manage our cost structure. The Board of Directors has been focused on this issue over the course of the year and concluded that a thorough review will inform decisions that drive strong value creation for our shareholders in what we expect to be an uncertain environment.”

“Emerson maintains an open dialogue with all shareholders and welcomes their input on potential opportunities to enhance shareholder value,” said Clemens A.H. Boersig, Lead Independent Director. “We will carefully evaluate D.E. Shaw’s proposals as we continue to assess value-creation opportunities.”

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