Hedge fund D.E. Shaw raises pressure on Emerson, calls for breakup

(Reuters) – Hedge fund D.E. Shaw on Tuesday increased the pressure on Emerson Electric Co by publicly urging a breakup of the U.S. industrial conglomerate, a move it says could unlock more than $20 billion worth of shareholder value.

The New York-based hedge fund, which owns a more than 1% stake in the Ferguson, Missouri-based company, wants it to split into a pure play industrial automation business and a climate technology-focused firm, D.E. Shaw wrote to the board.

It also wants the company, which keeps a fleet of eight corporate jets and a helicopter, to cut costs and update its governance structure under which its directors are elected to three-year terms while the industry standard is for one-year terms.

The hedge fund expressed concern that only one Emerson director out of 10 has bought stock with his own money in the last years, which could suggest that board members are not appropriately invested in the company’s performance, a person familiar with D.E. Shaw’s thinking said.

The hedge fund also wants Emerson to change how it pays management.

“To create maximum and enduring value for its shareholders, Emerson needs to change,” the letter said.

“We believe the right set of actions could result in over 50% upside to Emerson’s share price,” it added.

The company in a statement on Tuesday said it would look at what D.E. Shaw is suggesting. “We will carefully evaluate D.E. Shaw’s proposals as we continue to assess value-creation opportunities,” Emerson said.

Emerson’s stock price climbed 1.5% on Tuesday, but it has lost 12.6% in the last year and has underperformed its peers by 45% over the past five years.

D.E. Shaw has owned Emerson stock for years and has quietly spoken with management about ways to improve efficiencies.

Emerson previously pledged to review its “operational, capital allocation and portfolio issues,” but the hedge fund wants to see more accountability and a quicker pace of change.

“Put simply, creating two separate, leaner, more focused organizations would ensure that Emerson’s businesses remain forces to be reckoned with, far into the future,” the letter said.

A spokesman for the hedge fund on Tuesday declined to comment beyond the letter.

D.E. Shaw stopped short of calling for long-term Emerson Chief Executive David Farr to step down, something a number of activist hedge funds have requested in previous campaigns. Farr has suggested that he will likely retire in the next 18 months.

The hedge fund wants fresh blood in the boardroom and could nominate its own director candidates before the Nov. 6 deadline, potentially adding to the pressure on the company to take action by giving other shareholders a way to express concerns.

The letter comes more than two weeks after Reuters reported that D.E. Shaw was building a stake in the company and was planning to push for changes.