Essay: The Starboard-Newell proxy fight

Newell Brands is an American-based company that specializes in consumer and commercial products. The conglomerate is made up of a variety of brands, including but not limited to: Rubbermaid, Oster, Calphalon, Yankee Candle, Sharpie, Paper Mate, Expo, Quickie, and Jarden. Currently, Newell Brands is one of the largest companies that supplies classrooms, households, and recreational activities.
In 1903, The Newell Manufacturing Company was founded by Edgar Newell. Originally, Newell began by producing curtain rods. The company was able to leverage its production capabilities as its machinery was able to produce curtain rods more efficiently than any other company in the industry. Over time, as Newell grew and began mass production, it adapted a growth-by-acquisition strategy. In 1972, Newell went public at $28 a share, and by 1992 Newell had grown its portfolio by acquiring EZ Paintr Corporation, Mirro, Anchor Hocking, Amerock and Sanford. Today, the company is made up of fifty-six brands, which are divided between its Live, Learn, Work, and Play lines.
Currently, the Chief Executive Officer & Director of Newell Brands is Michael B. Polk, who took up the role of CEO in July 2011. He has been on the board of directors for Newell since 2009. The other board members prior to the proxy fight can be seen in Figure 1 in the Appendix.
B. Starboard Value, LP
Starboard Value is a New York-based investment advisor that invests in undervalued public companies and actively works with management in order to unlock value for shareholders. The Firm was founded in 2002 by Jeff Smith and Mark Mitchell, and currently has discretionary assets under management (AUM) of $6,339,082,525. Starboard Value serves between 11-25 clients, and has replaced over 100 corporate directors on over 40 boards.
Starboard is regarded as one of the most successful hedge funds in the United States, known for its ambitious and high-profile battles. Since 2002, Starboard has been profitable in 85 percent of activist deals.  Under 13D filings, Starboard Value’s average return is 26.4 percent, versus the S&P 500 industry average of 9.7 percent. Therefore, it is evident that Starboard Value achieves great success in its investment endeavors and through promoting directors to struggling boards.
II. Newell’s Corporate Governance
Jarden Acquisition
Although Newell has a growth-by-acquisition strategy, the Jarden acquisition was the largest in company history at over $18 billion in cash and stock. Initially, the acquisition doubled revenue, tripled Newell’s employee base, and significantly increased financial leverage. Since then, revenues have stagnated and margins have continually declined. Starboard suggests that this is a result of poor integration of the two companies. However, Forbes suggests it was a poor investment from the beginning. Newell anticipated “strong, competitive core sales growth” and “immediately accretive to normalized EPS,” which are both non-GAAP measures. Newell’s non-GAAP measurements remove the costs of growth that will have an impact on the profitability of the merger.  Newell has a 7.4% WACC,  but the Jarden merger has only a 4% ROIC. This acquisition was a turning point for Newell and it hurt the direction of their company. The investment benefits only the executives in the board, while no synergies have been realized and shareholders are seeing no benefit from this decision.
Newell’s Governance Issues
Since the Jarden acquisition in 2015, there has been ongoing discord between the former Jarden executives on Newell’s board and Newell management. One of the former board members, Martin Franklin, was the Chairman of Jarden before selling his company to Newell. In early 2018, Franklin unsuccessfully attempted to become Chairman of Newell’s board. Franklin, along with other former Jarden executives Domenico De Sole, Ros L’Esperance and Ian Ashken, subsequently resigned from Newell’s board after Franklin failed to secure the position. They cited Newell CEO Michael Polk’s mismanagement of the $18 billion acquisition as the primary reason for their discontent. A main area of discontent for the former Jarden executives was Newell’s plan to sell brands like Rawlings and Bicycle, some brands being those acquired along with Jarden. This divestiture was announced in early 2018 along with Newell’s Acceleration of Transformation Plan. According to Newell, this plan would result “in a significant reduction in operational complexity through a 50 percent reduction in the company’s global factory and warehouse footprint, a 50 percent reduction in its customer base and the consolidation of 80% of global sales on two ERP platforms by end of 2019.” However, this plan also lowered Newell’s estimated financial results for a second time in the past few months. This move by Newell was seen as both hasty and an attempt to lessen the appearance of poor financial performance.
Furthermore, Franklin and several other board members argued that Polk’s failure to successfully integrate the two companies was a strong factor for Newell’s declining performance. Many executives post-acquisition were in charge of larger business units, but were not fit to deal with many of the industry challenges that Newell was facing. As a result, Franklin wanted the board to have more control over the Company’s operations in order to keep management accountable for organizational decision making.
Compensation & Alignment with Shareholders
The primary activist issue with the Jarden merger is that it only benefits executives and creates no value for shareholders. Executive compensation at Newell is based on core sales, normalized EPS, and normalized gross margin. These were also the non-GAAP measurements Newell highlighted as benefits of the merger. In addition, these measurements are not impacted by the cost of the merger. Newell anticipated less synergies at $500 million, significantly less than the $1.6 billion premium that they paid for Jarden. The structure of compensation at Newell creates misalignment between the board and the shareholders. The board benefits from non-GAAP measures that are not affected by the large cost of investment at Newell, while shareholders gain a return from Net Income calculated according to GAAP. These different goals cause the board to continue making acquisitions that will increase their compensation, but that are hurting shareholder value.
The misalignment between shareholder value and executive compensation can be seen in the non-GAAP and GAAP reported EPS. For compensation purposes, management utilized Normalized EPS (a non-GAAP measure) as a factor in setting executive compensation. However, this metric is highly skewed in order to meet performance-based targets. Normalized EPS removes advisory costs, personnel costs, restructuring costs, inventory changes and acquisition and integration costs from its reported GAAP Net Income, which inflates the metric’s true value. Looking at the GAAP-reported EPS, which is what shareholders value when evaluating Newell’s performance, it is evident that the Normalized EPS is over-valued while shareholders are losing value. Thus, executive goals and shareholder value does not align when setting compensation at Newell.
III. Starboard Value’s Intervention
Previous Activism
Starboard’s most prominent intervention was its role in the 2014 Darden Restaurants proxy fight. Starboard began its activist battle when it opposed Darden’s proposal to sell Red Lobster. In addition, Starboard criticized Darden’s poor capital allocation, wasteful capital expenditures and undervalued real estate assets. Starboard claimed that implementation of their plan, which focused on lowering G&A costs, weak food cost synergies, real estate separation, would result in annual EBITDA to increase by $215-$326 million and the share price to increase by $19-$38 per share. With a minority 8.8% stake in Darden, Starboard managed to replace the entire board of directors with its own nominees, making Darden the first S&P 500 company to have its entire board of directors overthrown. Since Starboard’s successful coup, Darden has experienced skyrocketing growth. By early 2016, Darden stock was valued at $64 a share and traded as high as $99 dollars in early 2018, surpassing Starboard’s expected market value of Darden stock. In addition, EBITDA increased from $613 million in 2014 to $825, $912, $987 in 2015, 2016 and 2017, respectively.
In 2015, Starboard wrote to Yahoo! Inc., citing Yahoo’s overdependence on Alibaba stock, inability to remodel its core business model and poor management decision-making (especially by CEO Marissa Mayer) as reasons for intervention. Starboard called for all board directors to be replaced by its own nominees at the same time Yahoo was garnering bids for its acquisition. Eventually, Starboard reached a deal to add four new board members, including Starboard CEO Jeff Smith. Yahoo’s core assets were acquired by Verizon Communications for $4.8B in 2016; part of this sale was due to Starboard’s pressure on Yahoo to sell its core business.
From these two examples, it is evident that Starboard is successful in unlocking value in struggling companies. These examples are supported by the fact that the average 13D return for companies who place Starboard nominees on their board is 34.5% versus 14.8% for the S&P 500. These past precedents of activism are important to consider when analyzing Starboard’s intervention of Newell Brands as the proxy fight is still in progress between the two entities.
Starboard’s Criticism of Newell
On March 8th, Kevin Conroy resigned from Newell’s board of directors, making him the fifth director to resign from this board in 2018. Conroy cited Newell’s ineffective “current course” for the company and past board issues as reasons for his departure. Starboard sees this unbelievable board dysfunction as all the more reason to pressure Newell into replacing their board with Starboard nominees.
Currently, Starboard holds a 4 percent stake in Newell’s outstanding shares, making Starboard one of Newell’s largest shareholders. In a February 2018 letter to Newell, Starboard criticized Newell’s stock performance, citing a 42 percent decline in Newell’s stock price since the Jarden acquisition. When comparing Newell’s stock price relative to the S&P 500, it is evident that Newell is underperforming compared to the market. Since the Jarden acquisition in 2016, Newell’s stock price has declined over 40 percent, whereas the S&P 500 has increased by 41 percent. As a result, Newell is trading less than 10x 2018 EPS:
Starboard is also highly critical of the Jarden acquisition, which has yet to create any value for shareholders. In the 2015 earnings report, Michael Polk claimed that the Jarden acquisition would result in many financial benefits:
“The first $500 million of synergies is expected to create a company with EBITDA margins of over 20% and annual EBITDA of over $3 billion, giving us the firepower to reduce the leverage ratio to 3 time to 3.5 times within two years to three years and then, subsequently, to deploy capital to create further value beyond our organic agenda.”           – Michael Polk, 2015 Q4 Earnings Report to Shareholders
Polk’s claims that the acquisition would result in cost savings of over $500 million in the next 5 years and an annual EBITDA of $3 billion have yet to be realized. Since 2015, SG&A annual expenses have increased by an average of 54.5 percent (whereas the increase in annual SG&A costs before the acquisition was 1.3 percent). Furthermore, Newell’s failure to reach its annual EBITDA post-acquisition projection of $3 billion further demonstrates Newell management failures. Finally, looking at Newell’s leverage ratio over the past three years indicates that the leverage ratio remained 77 percent higher than management’s 2-3 year target. Overall, since acquiring Jarden, there have been significant missteps by management and the board, thus failing their shareholders and creating a bleak financial outlook. Therefore, Starboard is hesitant about Newell’s ability to predict accurate and meaningful financial estimates for the 2018 fiscal year.
According to Starboard, over $11 billion worth of shareholder value has been lost as a result of poor financial strategy. However, management compensation has increased despite falling stock and earnings. Furthermore, the resigning of five board members indicates serious dysfunction on the board (the majority of vacated directors having been from Jarden management). Martin Franklin (the former CEO of Jarden) is aiding Starboard in their attempt to oust Newell’s board and CEO.
Further criticism of Newell arose when the Company announced it was selling off its non-core business assets. This move by Newell was seen as a distraction in an effort to cover up its poor performance since the acquisition, creating an even greater strategic rift between Starboard, former Jarden management, and Newell.
Starboard’s Strategy for Newell
In response to Newell’s board dysfunction and ineffective management, Starboard recommended a series of changes in order to bring value back to Newell’s shareholders. Initially, Starboard attempted to replace the entire Newell board with its own nominees in the midst of a proxy battle. According to Starboard, the replacement directors have the experience and accomplishments to turn around Newell’s declining performance. The Firm is confident that the proposed directors could unlock value through strategic planning and putting a priority on shareholder interests. Starboard criticized the current directors’ unwillingness to invest in Newell stock, and the fact that the directors already own very few shares of stock to begin with. Furthermore, Starboard aimed to replaced Michael Polk as CEO with James Lillie.
Starboard Nominees to Newell’s Board of Directors
Bradley A. Alford
Previously Chairman and CEO of Nestle USA, where he grew revenue from $7.5 billion to $12.7 billion. He is known for focusing on people, innovation and execution.
Currently serves on the boards of Perrigo Company, Avery Dennison, and Conagra Brands.
Ian G.H. Ashken
Co-founder of Jarden Corporation, where he helped generate 50x shareholder return at Jarden.
Currently serves on the boards of Platform Specialty Products and Nomad Foods.
Previously served on the boards of Newell, Jarden, Phoenix Group Holdings and GLG Partners.
Pauline J. Brown
Previously Chairman of LVMH Moet Hennessy Louis Vuitton North America. She was also the Vice President of Corporate Strategy and New Business Development at Estee Lauder Companies.
Currently serves on the board of Del Frisco’s Restaurant Group.
Domenico De Sole
Previously President and CEO of Gucci Group NV, where he developed the almost bankrupt company into a multi-billion dollar powerhouse.
Currently serves on the boards of Sotheby’s, Pirelli, Ermenegildo Zegna and Tom Ford.
Previously served on the boards of Newell, Procter & Gamble, Delta Airlines, GAP, Bausch & Lomb, and Telecom Italia.
Peter A. Feld
Managing Member and Head of Research at Starboard Value, LP. Previously, he worked as Managing Director of Ramius LLC.
Previously served on the boards of Brink’s, Darden Restaurants, Insperity, Integrated Device Technology and Tessera Technologies.
Martin E. Franklin
Co-founder of Jarden Corporation, where he helped generate 50x shareholders return. Served as Jarden’s CEO and Chairman until Newell acquisition.
Currently serves on the boards of Restaurant Brands International and J2 Acquisition Limited.
Previously served on the boards of Newell, Justice Holdings, Bally Total Fitness, Lumen Technologies, Kenneth Cole Productions and Apollo Investment Corp.
James E. Lillie
Previously CEO and director of Jarden Corporation, where he created long-term shareholder value and is acclaimed as an effective organizational leader.
Currently serves on the boards of Tiffany & Co., Nomad Foods and J2 Acquisition Limited.
Gerardo I. Lopez
Previously President and CEO of Extended Stay America, where he completed a strategic plan to sell non-strategy assets and rebuilding company-owned assets.
Currently serves on the boards of Brinker International and CBRE Group.
Previously served on the boards of TXU Corp., Safeco, National CineMedia and REI.
Bridget Ryan Berman
Previously CEO of Victoria’s Secret Direct and CEO of the Giorgio Armani Corporation. She has experience in director-to-consumer business.
Currently serves on the board of Tanger Factory Outlet Centers  .
Previously served on the board of J.Crew Group.
Jeffrey C. Smith
Managing Member, CEO and CIO of Starboard Value, LP. He led a successful restructuring at Darden Restaurants that improved profitability and shareholder value.
Currently serves on the boards of Advance Auto Parts and Perrigo Company.
Previously served on the boards of Darden Restaurants, Yahoo!, Office Depot, Quantum, Regis, Surmodics, Zoran, Phoenix Technologies and Actel
Charles M. Sonsteby
Previously Vice Chairman, CFO and CAO of The Michaels Companies. He also was CFO of Rinker International where he instituted a variety of successful operational changes.
Currently serves on the boards of Valvoline and Darden Restaurants.
Previously served on the board of Zale Corporation.
Robert A. Steele
Previously Vice Chairman of Global Health, Group President of Global Household Care and Group President of North American Operations at Procter & Gamble. He was responsible for the expansion of business segments at P&G.
Currently serves on the boards of Berry Global Group and LSI Industries.
Previously served on the boards of Kellogg Company, Keurig Green Mountain Coffee and Beam Inc.
Starboard trusts that divesting assets could create substantial value. However, since Newell is planning on selling half of their core assets, Starboard wants Newell to wait for shareholders to vote on a new board before evaluating the strategic implications of a divestiture. This process would allow for the Company to analyze which assets would bring the highest after-tax value, rather than hastily sell off assets now before allowing for a complete analysis. Furthermore, Starboard believes that operating income could increase by $500 to $800 million by improving management efficiency; something that the proposed board would focus on.
IV. Analysis
Current State of Newell Board
On March 20th, Newell announced that it had appointed four new directors to the board based on nominations by another activist investor, Carl Icahn, and will be adding a fifth in the upcoming months. As a result, he will have control over 5 of 11 seats on Newell’s board of directors. Icahn owns a 6.86 percent stake in the Company, and he previously stated that he is in agreement on Newell’s transformation plan that intends to rapidly divest half of Newell’s core businesses. This new development left Starboard without a say in the ongoing governance issues at Newell. As a result, Starboard nominees Ian Ashken, Domenico De Sole, Martin Franklin and James Lillie withdrew their names from consideration. The move by Icahn also resulted in the removal of Michael Cowhig, the previous chairman of the board.
Newell’s Additions to Board of Directors (Based on Carl Icahn’s Nominations)
Patrick D. Campbell (Chairman)
Previously served as CFO and Senior Vice President of 3M. He also served as VP of General Motors International and Europe.
Currently serves on the boards of Stanley Black & Decker, Inc., SPX FLOW, Inc. and Herc Holdings, Inc.
Brett Icahn
Consultant for Icahn Enterprises LP., and previously served as an Investment Analyst for Icahn Capital LP.
Andrew Langham
General Counsel of Icahn Enterprises LP, and previously was an associate at Latham & Watkins LLP.
Currently serves on the boards of Cheniere Energy, Inc., Welbilt, Inc., CVR Partners LP and CVR Refining, LP.
Courtney R. Mather
Portfolio Manager of Icahn Capital, and previously served as a Managing Director at Goldman Sachs & Co.
Currently serves on the boards of Conduent Incorporated, Herc Holdings, Inc., TER Holdings Inc., Freeport-McMoRan Inc., and Ferrous Resources Limited.
The former Newell directors and Jarden executives who partnered with Starboard in the proxy fight were accepting of this unexpected turn of events. Martin Franklin, former Chairman of Jarden, stated that his “agenda was not to win but to change the attitude within the company.” Starboard announced that the Firm is open to Icahn’s proposed changes, but may still attempt to nominate its remaining nominees to Newell’s board.
B. Cost-Benefit Analysis
Newell’s plan, supported by Carl Icahn, is to sell off multiple brands at a projected after-tax value of $10 billion. However, the market responded poorly to Newell’s new initiative, as stock price declined 6 percent after Icahn appointed his four nominees to the board. Investors were not confident in Newell’s ability to raise attractive bids in a faltering retail environment for brands that are not as valuable as they once were. Furthermore, Newell’s past record of over estimating financial performance, only to lower projections once they are not reached, indicates that this plan is not as feasible as it seems. In addition, Icahn’s agreement with Newell to quickly sell off brands indicates short-term thinking that may bolster Newell’s financial performance on paper but will not create any long-term value for the company.
Icahn is well-known for short-term returns on his investment rather than securing long-term performance improvement in companies. As one analyst put it, Icahn routinely “bets on out-of-favor companies that are ripe for a rebound.” However, he typically only keeps companies in his portfolio for a maximum of eighteen months. For instance, his involvement in AIG’s proxy fight in 2016 ended with Icahn placing two nominees on the American insurance corporation’s board of directors. However, looking at AIG’s stock price since, the market has fallen back to its 2016 stock value.
AIG’s Declining Stock Price
Icahn recently came out on top in a battle with Bill Ackman over the future of Herbalife. Their discord began in 2013 when Ackman called Herbalife a pyramid scheme and took a short position anticipating that the company would begin to lose value. Icahn said this action by Ackman alerted him to the stock, and he believed that the company would grow. He has made about $1 billion off of this investment and Ackman has gotten out of his short positions after admitting defeat. However, this simply shows that Icahn is a good investor. He is a self-made billionaire, but he fails to instill long-term change in companies. He makes a profit and moves on to the next investment, unlike Starboard who focuses on changing strategy and long-term success for companies they invest in.
Starboard has demonstrated it is capable of producing long-term operational success when it has won its proxy fights. The Darden Restaurants takeover in 2014 resulted in substantial ongoing financial gains for the company, surpassing even Starboard’s projections. Furthermore, Starboard’s nominees for Newell’s board came from a diverse and accomplished background in business, seven out of the twelve nominees having been CEOs at one point in their career. According to Larcker and Tayan, board members who are CEOs are preferred to members who have not held that position. In a survey conducted by the National Association for Corporate Directors (NACD), 97 percent rated board candidates who are current or former CEOs as either critical or important in recruiting new members. On the other hand, three out of the four of Icahn’s appointed directors are Icahn’s direct employees (none of whom have senior executive positions), indicating a potential lack of thought diversity and consumer industry expertise.
One downside to Starboard’s position in this proxy fight is the Firm’s unclear strategic initiatives for Newell. Starboard has put up 12 nominations, which would replace all of Newell’s current board members. Newell argues that this turnover would be disruptive, and that will no clear plan the change would be harmful to the company. Mr. Franklin wants Newell to operate on the Jarden model, as he led Jarden prior to the Newell acquisition. Newell, on the other hand, criticizes the high salary Franklin received at Jarden. Newell is committed to their own transformation plan, but weary of the lack of direction that Starboard has shown with their interest in a takeover.
If Newell continues its proxy fight with Starboard, it may end up costing the Company millions in legal fees and solicitation firms. Starboard’s previous proxy fights with Darden and Yahoo have cost each firm around $12 million. The impact of a potential proxy fight is outlined in Newell’s 2017 10K, seen in Figure 4 in the Appendix. Newell fears the cost of a proxy fight, the potential operational disruption during the fight, and the possible finance issues that could follow such drastic turnover in company leadership. Starboard seems unconcerned about these short term costs because they believe Newell is underperforming and that change must happen now if Newell can survive long term.
While Newell, Starboard and Icahn all have pros and cons in their plan to increase shareholder value, it is our opinion that Starboard would have implemented the most effective long-term change for Newell. Although the Firm has not strategically mapped out its plan for Newell, Starboard’s strong track record of success and meticulousness indicate that the course of the proxy fight would have yielded a stronger strategic platform (as seen in the 294-page presentation sent to Darden in 2014). Furthermore, while Icahn is a renowned investor, he is more focused on the short-term, whereas Newell is clearly need in deep-rooted changes during this period of restructuring and financial pitfalls. Starboard’s nominees indicated a more change-oriented platform in comparison to Icahn’s nominees (who support Newell’s transformation plan). Newell’s continuous reliance on non-GAAP reporting (which has proved to be faulty and misleading to shareholders) further demonstrates that strict oversight is necessary for management, and that the diversititure plan of $10 billion is an overreach by Newell. Though this proxy fight is not yet over for all parties involved, we believe that more adjustments are needed on Newell’s board in order fully evaluate the long-term impact of Newell’s upcoming plans and to keep management in check.
C. Discussion
The Starboard-Newell proxy fight raises several interesting points of discussion regarding corporate governance. One of Starboard’s main criticisms of Newell’s board is that the directors owned far too few shares of Newell stock. An article by the Harvard Business Review argues that directors should be paid only in restricted equity. This claim is supported by research that states directors who own more shares of the company’s stock performs better in the long-term and are more likely to voice their discontent to the CEO when company stock is declining. While there are drawbacks to equity-only based director compensation, such as lack of liquidity, it indicates that directors who own more company stock are likely to secure better financial performance for the company. One recommendation is for board members to invest their own net worth in company stock, putting higher stakes on their performance and increasing devotion towards the company.
Another take away from Newell’s proxy fight is how executive compensation should be set. In the case of Newell, executives can skew non-GAAP measures to meet performance targets. This does not create any value for shareholders, as their return on investment stems from GAAP-reported measures such as EPS and Net Income. This example demonstrates the importance of having shareholder and executive values align. When executive and shareholder interests do not align, as in the case of Newell, it can lead to expensive and vicious proxy fights that deter company operations.
Although Newell’s proxy fight is still ongoing, it indicates the importance of functional corporate governance that ensures management is held accountable for delivering value to shareholders and creating sustainable long-term initiatives for the company. With the increasing role of activist investors in instilling change at public companies, it will be interesting to see how the corporate governance landscape evolves as directors are now held more accountable than ever before.