* Activist investor Relational acquires 8.8 pct stake in SPX
* SPX's Gardner Denver bid in Dec was trigger for activism
* Relational thinks SPX should divest thermal, industrial
* Relational also to address executive compensation at SPX
By Soyoung Kim
NEW YORK, Feb 28 SPX Corp's takeover bid
for rival Gardner Denver Inc, which would have been an
industry game-changer if successful, ended up putting the
diversified manufacturer in a spot that many companies wish
strenuously to avoid: Having a big-name activist as its largest
Ralph Whitworth's Relational Investors LLC disclosed an 8.8
percent stake in the industrial machinery maker on Monday,
saying the company's shares and profit suffered from its
"growth-at-any-cost strategy" and "excessive prices" paid for
Relational set its sights on SPX in December as people
familiar with the matter told Reuters that the industrial
machinery maker was in advanced talks to buy Gardner Denver for
more than $4 billion, or $85 per share - news that sent SPX's
shares plunging that month.
Relational, which was not a shareholder at that time, felt
the bid - which would dwarf SPX's market value at the time of
less than $3 billion - was too big a bite and would endanger the
company's stated goal of paring down to focus on flow
That unit makes equipment used to produce liquids ranging
from petroleum to dairy products and had 2012 sales of $2.7
billion, just over half of SPX's total revenue.
Only after the talks broke down in late December in the face
of backlash from SPX shareholders, which was reported by Reuters
on Dec. 21, did Relational start buying shares.
SPX's market value, which tumbled as low as $2.8 billion during
the deal talks in December, has since recovered to $3.8 billion.
Now, the San Diego-based investment firm intends to make
sure that management sticks to its commitment to become a flow
technology-focused company, divesting noncore assets and not
paying top dollar for deals, said the people familiar with the
investor. They asked not to be named because they were not
authorized to speak with the media.
Representatives for Relational declined to comment. But the
investor disclosed in regulatory filings on Monday that the
significant drop in SPX shares in December "reflected the
market's lack of confidence in the board and management's
ability to properly discipline capital and asset acquisition
SPX declined to comment for the story. SPX shares were down
0.3 percent at $80.66 on Thursday afternoon.
ASSET SALES, PAY
SPX Chief Executive Chris Kearney has been adding and
selling businesses to focus more narrowly on flow technology
over the past few years, and last year sold its automotive
service solutions business to Robert Bosch GmbH for net proceeds
of about $1 billion.
Charlotte, North Carolina-based SPX still has two other
major segments that make up nearly half of revenue: a thermal
business that makes cooling towers and heat exchangers for power
plants as well as boilers, and an industrial unit that makes
power transformers, industrial tools and precision machine
Relational believes that SPX should sell its thermal
business, which had roughly $1.5 billion in revenue last year
and has grappled with declining demand as well as increased
competition from China, the people familiar with the investment
SPX can also boost its share price significantly by
divesting the bulk of its industrial business, except for the
power transformers, the people said.
Power transformers, used by utility companies, represented a
third of the industrial segment's $927 million revenue in 2012
and Relational sees value in keeping this part of the industrial
business as sales are likely to rebound, the people said.
A flow control-focused SPX will open up the company for
consolidation opportunities in an industry that has seen a wave
of deals over the past years, but Relational's focus is on
divestitures rather than a sale of the company, the people said.
In July, United Technologies Corp sold its Hamilton
Sundstrand flow control businesses to Carlyle Group LP
and BC Partners for $3.46 billion, following an auction that
also attracted interest from SPX and Dover Corp.
Earlier last year, Pentair Ltd merged
with Tyco International's flow control business to create an
"If the company is operating in a proper manner and with a
proper compensation scheme, that will give SPX a valuation in
the marketplace that is equal to or in excess of what they could
be sold for," said one of the people familiar with the
Relational, which expects to meet with management in the
near term, also will argue that the company should align its
executive compensation structure more closely with shareholder
returns. Institutional Shareholder Services and Glass Lewis,
leading proxy advisers, both criticized SPX's proposed
management compensation last year.
The proposal, which called for higher executive compensation
for 2011 even as the stock prices declined over the period,
narrowly passed shareholder votes.
Relational has scored major wins with its activist campaigns
at several industrial conglomerates in recent years.
Whitworth pressured industrial conglomerate ITT Corp
to split up its defense and water purifying businesses. The
investor, which owns a 2.73 percent stake in Illinois Tool Works
Inc according to Reuters data, was also instrumental in
convincing the industrial conglomerate to pare down operations.
In one of the latest campaigns, Relational is also urging
Timken Co to break up its steel and bearings businesses,
a proposal that the investor has said has strong shareholder