Monday, March 1st, 2010
Activist Investors Circle around P&F Industries
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P&F Industries, Inc. (NASDAQ:PFIN) may be in a rather simple industry, but it continues to face pressure from at least two activist shareholders seeking to curb executive compensation and unlock value for investors.
P&F Industries, Inc. (PFIN, Free Analysis), a tools and hardware company, is seeing significant shareholder pressure from at least two activist investors that have been in contact with management. These investors believe that the company is significantly undervalued and are pushing for changes that could be implemented to maximize shareholder value.
Private investor Timothy Stabosz, one of the lead activists that owns approximately 6.1% of the company, is actively seeking consideration for appointment to the board and answers to several concerns regarding the level of executive compensation, the need for more transparency, and the legitimate interests of outside shareholders.
In a letter to the company, Mr. Stabosz outlined several suggestions to management:
1) Respondent has requested elimination of the bylaw requiring that the chairman of the board (if there be one) must be the CEO of the company. Going further, respondent has also requested the board consider a bylaw that requires separation of the chairman of the board (COB) and CEO roles, for any COB/CEO owning 10% or more of the company’s common stock.
2) Respondent has requested the board consider a bylaw that requires the independent directors meet in executive session at every board meeting (even if, as a matter of course, they might already be doing so).
3) As an “acquisition strategy” has been P&F’s “bread and butter” the past decade or more, the respondent has requested that executive pay be more closely tied to the success or failure of acquisitions, since they are a major determinant in whether shareholder value is created or destroyed (and it is the respondent’s belief that top executives have been a major driver of the company’s acquisition strategy). With this in mind, the essence of any proposed restructuring of executive pay should include a material decrease in the “base salary” component, relative to the bonus component. In the respondent’s opinion, the compensation amounts that have been paid to the top executive over the period 2001-2006 (and since then) are not reasonable, in the context of the meager 8.7% average annual return on equity respondent has calculated the company achieved for the “trough-to-peak” economic cycle running 2001-2006.
4) In lieu of #3 above, the respondent has suggested, instead of pursuing acquisitions (based upon the spotty record of success, at best), that the company be managed for cash flow, in the next upcycle, which would facilitate stock buybacks or dividends (which tend to provide more certain value accretion over time), and an appropriate “going private over time” strategy, that respondent believes is more accountable to the needs and desires of the entire shareholder base, while simultaneously leading the company towards an (eventual) elimination of burdensome public company costs.
5) Based upon his own private analysis casting doubt on the Nadel Consulting Group study on executive pay that was commissioned by the Compensation Committee, the respondent has requested (if he should not be able to review the study as a member of P&F’s board) that the board release the study in an 8-K filing…for the sake of transparency and accountability, over a matter of legitimate doubt and grave good faith concern. Other companies (which respondent is willing to document) have released “internal” compensation studies. This single step would do more for assuring outside investors regarding the issue of “independence” than probably anything else respondent can think of, except perhaps for reconstituting the board itself, to include more independent members, with material stock ownership positions (which the board, to its credit, appears to be pursuing).
Other large investors agree that changes are necessary, and have indicated their own desires in other activist filings with the SEC. These parties include 7.4% owner Lawndale Capital Management, LLC and 6.3% owner Diamond A Partners, L.P. The filers continue to push for strategic alternatives that could be employed to maximize shareholder value.
Whether these changes are implemented remains to be seen, but this small stock now has a number of catalysts in the coming months. Investors will be closely watching the next board elections to see if these activists gain a seat, where they can more effectively push for changes designed to unlock and maximize shareholder value.
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-- Written by Rick Telfur
