For years rumors have swirled that shareholder activists were zeroing in on Textron (NYSE: TXT), a multi-industry conglomerate with five diverse business segments. Textron's corporate management has given little attention to pressures from the new batch of corporate raiders looking to sell off parts of its business and restructure others to increase the value of its common stock.
Despite resistance from Textron, the rumors continue—the company was listed in The Deal Pipeline's top ten targets for activist investors in 2014. The July 16th release of its 2014 second quarter fiscal report justified activist investors' interests. Historically, the gains made in some of Textron's five business sectors have been stunted by the weak performance of others — 2Q2014 was no different. Textron's current business strategy, however, indicates that shareholder activists' dreams for Textron remain a dream.
Break me off a piece of that Textron
Shareholder activism has been on the rise in the defense industry since 2010 with activists attempting to unlock the value of floundering companies through divestments and restructuring. MMI Investments' success in pushing the sale of Applied Signal Technology, manufacturer of Intelligence, Surveillance and Reconnaissance (ISR) products and systems, to defense giant Raytheon (NYSE:RTN) paved the way for shareholder activists to hone in on large defense contractors struggling due to a reduction in Defense Department spending. Textron has long been considered an attractive target.
Textron operations are divided into five segments: Cessna (now Textron Aviation), Bell, Textron Systems, Industrials and Finance, that have little to nothing in common. Cessna, the general aviation division, and Bell, the division responsible for military and commercial helicopters, are well-established brand names in the aerospace industry but have no overlap that would reduce production costs. The primary sources of revenue for Textron Systems, producer of unmanned aircrafts and related systems, are contracts from the U.S. government and Foreign Military Sales.
Its industrials segment produces fuel systems, golf carts, off-road vehicles and powered equipment primarily for the commercial market. The finance segment is a commercial financing business designed to help fund the sales of its Cessna and Bell products. Each division has, at one point or another, dragged down the value of Textron's common stock. Cessna was the business sector responsible for stunting Textron's revenue in 2Q2013 recording a loss in profit of $50 million. That place was traded in 2Q2014 to Textron Systems, where revenue decreased $140 million, and Finance, which recorded an $8 million decrease in profit.
RBC Capital Management analyst Robert Stallard released a report in 2013 that argued Textron could increase its stock value to $42 a share. (At the time of the report Textron was valued at $28 a share) Stallard projected that Textron could return its stock share price to their highest value since 2008 if it sold the businesses couched in its industrials segment and eliminated its finance division. In Stallard's vision, Textron would become a diversified aerospace company with its Cessna, Bell and Textron Systems products. Other activist investors speculate that Textron Systems could be spun off into its own entity eliminating the drag government contracts have created on the company's balance sheets. Spinning off Cessna and Bell have also been discussed as viable options that would increase the stock value of the company. Analysts and activist investors have been talking, however, Textron has not been listening.
Rumors that Textron was caving to the pressure of activist investors were fueled by a 2012 internal strategic review that examined the option of spinning off some of its operating segments. Textron's review coincided with the expressed interest from Ralph Whitworth's Relational Investors of buying a stake in the company. Relational Investors was a major force behind the industrial conglomerate ITT's decision to split into three companies in 2011 and L-3 Communications' spin-off of its government services unit that became Engility in 2012.
The rumors, however, have remained in the realm of gossip. Relational Investors has yet to move ahead with efforts to acquire a major stake in Textron and CEO Scott Donnelly has pursued other avenues to unleash the value of Textron's operating segments. Rather than spinning off its operating segments, Textron strengthened its Cessna segment by acquiring Beechcraft in the first quarter of FY2014 and morphing the Cessna division into Textron Aviation. That move, combined with the repurchase of 4.3 million shares of common stock in the first quarter, pushed Textron share prices to a 52 week high of $41.15 on June 9, less than a dollar off of Stallard's projected share price if Textron were to split up. Textron's diverse and unrelated business segments may continue to excite and entice activist shareholders. However, Textron's management seems determined to increase the company's stock performance all by themselves.