"Spirit of Michael Price" may (finally) turn Thermo Electron around.
MARKET PLACE -- May 11, 1999
Successors to Michael Price Apply Pressure, Too
By EDWARD WYATT
The spirit of Michael Price has risen, and it
is hovering over Thermo Electron Corp.
Barely six months after Price retired from
active oversight of the Franklin Mutual Series
funds, a group of six mutual funds with more
than $21 billion in assets, his successors are
showing that they intend to continue his
practice of aggressively focusing on companies
with underperforming stocks.
Applying a brand of shareholder activism rare
among fund managers, Price made his
reputation and fortune by taking big stakes in
companies, then advocating change at them --
perhaps most famously with Chase Manhattan
Corp., which ultimately merged with Chemical
Bank.
Now in his successors' sights: Thermo
Electron, a sprawling group of medical
equipment and industrial machinery companies
based in Waltham, Mass., whose stock price
has fallen by more than 50 percent in the last
year.
Last week, the Franklin funds fired off a
pointed letter to George Hatsopoulos, Thermo's
chairman and chief executive, requesting more
independent directors on the company's board,
an aggressive share-repurchase program and a
restructuring of the corporation and its 23
publicly traded subsidiaries. Franklin Mutual
said it owns 3.4 million Thermo Electron
shares, or about 2 percent of the total.
The letter sets the stage for a dramatic
confrontation at the company's May 27 annual
meeting in Waltham.
That meeting could also be a tense debut for
Richard Syron, who on June 1 will move from
chairman of the American Stock Exchange to
chief executive of Thermo Electron.
Founded in 1956 by Hatsopoulos, a Greek
immigrant and mechanical engineer who is
now 72 years old, Thermo Electron develops
new technologies and then builds separate
companies around them. Their wide-ranging
operations, from biomedical instruments to
paper-making and recycling equipment, fall
into four business segments: measurement and
detection; biomedical technologies; energy and
the environment, and recycling and resource
recovery.
In part because of its unusual strategy, Thermo
Electron has achieved a fairly high profile. Its
revenue of $3.87 billion ranks No. 394 in the
Fortune 500 list of the largest companies, and
as a component of the Standard & Poor's
500-stock index, its shares are broadly owned
by mutual funds, pension funds and other
institutions.
But shareholders have often complained that
the spinoff strategy has fragmented corporate
resources, splintered management's attention
and weakened the parent.
After profits fell last year and the stock
plummeted, Thermo Electron laid out a plan to
reduce its publicly traded subsidiaries to 16
from 23. The company recently announced
plans to repurchase $100 million in stock, in
addition to $102 million bought back this year
and $28 million already slated for repurchase.
The management, though, is apparently
moving too slowly for the Franklin fund
managers. Another disgruntled contingent are
investors who paid $40.625 for Thermo
Electron shares in an April 1998 stock offering.
The stock gained 87.5 cents Monday on the
New York Stock Exchange, to close at
$18.3125.
"The company's stock performance over the
past year -- down 60 percent, versus an
increase of 18 percent for its peer group --
reflects a failure to take full advantage of the
rich hidden assets within an overly
complicated corporate structure," wrote David
Marcus, a Franklin senior vice president, and
Robert Friedman, chief investment officer for
the Mutual Series funds, in a letter last week to
Hatsopoulos.
"We believe this performance is unsatisfactory
and should not be allowed to continue given
Thermo's rich management talent, market
position and financial flexibility," read the
letter, a copy of which was provided to The
New York Times by a person sympathetic to
the fund company's plans.
In an interview Monday, Friedman said that
the fund company had been in touch with
Thermo Electron's management and that he
expected discussions to continue. Thermo
Electron executives did not return phone calls
seeking comment. A company spokesman,
who confirmed receipt of the letter, said, "Our
responsibility is to take into account all
suggestions from shareholders."
Syron, whose rich compensation package at
Thermo includes three years of guaranteed
bonuses and has sparked dissension on
Internet message boards, was traveling
Monday and unavailable for comment.
Under Price's guidance, the Mutual Series of
funds, which includes Mutual Shares, Mutual
Qualified and Mutual Beacon, over the years
bought large stakes and then pressured a
company's management for change. Price, who
sold the fund company to Franklin Resources
in 1996, remains chairman of the Mutual Series
funds but does not participate in investment
decisions.
His efforts often resulted in big profits for the
Mutual Series funds, as well as other
shareholders. Winning investments included
Storage Technology and Sears, Roebuck & Co.
Sometimes the campaign culminated in the sale
of a company, as with Price's 1995 pursuit of
Chase Manhattan, which a year later merged
with Chemical Banking Corp.
But the funds have also had high-profile
failures. In late 1996, the funds bought a large
stake in Cityscape Financial, a consumer
finance company that subsequently filed for
bankruptcy. And its holdings of Sunbeam
Corp., though acquired for pennies a share
when the company was in bankruptcy
proceedings, have lost much of their value in
the last two years amid management turmoil
and accounting problems at that company.
As part of their recommendations for Thermo
Electron, the Franklin managers requested that
the company add more independent, outside
directors, preferably executives far younger
than the current group of 12 members, half of
whom are older than 70. Five directors have
served on the board for more than 20 years,
and 10 are company officers or serve on the
board of one of Thermo's subsidiaries.
The fund managers also sought the removal
from the board of John Hatsopoulos, the
chairman's brother and the company's former
chief financial officer. In the proxy statement
for the upcoming annual meeting, Thermo
Electron states that it has agreed to pay him
$500,000 annually for the next five years as a
consultant. In addition, he is to be renominated
to the board this year and again in 2002.
"We find this action to be irresponsible and
certainly not in the best interest of
shareholders," the Franklin managers wrote.
"He has had ample time to make his fortune
from Thermo Electron."
The Franklin managers also proposed that
Thermo Electron further reduce the number of
its public subsidiaries, focusing "on markets
where the company holds a clear competitive
advantage and market dominance," and
borrow money to pay for an "aggressive
share-buyback program."
Thermo Electron's financial condition is
exactly the type that often attracts the Franklin
Mutual Series funds, which practice the
"value" style of investing, characterized by
searching out underpriced assets.
While revenues have continued to rise, profits
have fallen, leading the company's share price
to decline sharply. Meanwhile, Thermo
Electron's balance sheet is rich with assets,
including $1.5 billion in cash -- the equivalent
of $8.50 a share.
The company also has relatively little
long-term debt; it totals $2 billion, equivalent
to a third of total capitalization.
"It is our view that a buyback financed with
straight debt would increase earnings per share
as well as return on equity," the fund managers
wrote.
Last year, Thermo Electron earned $181.9
million, or $1.07 a share, on revenue of $3.87
billion. Those earnings were down from $239
million, or $1.41 a share, the previous year,
despite an 8.7 percent increase in revenues,
from $3.56 billion.
The Franklin managers are not the only
disgruntled shareholders. A topic of
conversation recently on Internet message
boards devoted to Thermo Electron has been
the compensation package for Syron.
In addition to an annual base salary of
$800,000, Syron is to receive guaranteed
minimum bonuses in each of his first three
years that average $166,667 a year. He will also
receive $200,000 in Thermo Electron shares in
each of the three years and an option to buy 1
million shares upon taking over as chief
executive.
Thermo Electron has also agreed to buy
Syron's house in the New York area for $1.5
million and put it up for sale. The price paid to
Syron is subject to adjustment based on the
resale value.
Copyright 1999 The New York Times Company |
