Why Manitowoc Company Is an Activist Investor Target

Source: Manitowoc.

In the corporate world, conglomerates often involve businesses that are at least vaguely related to each other. Yet for Manitowoc (MTW 2.11%), the combination of its crane construction segment and its manufacturing of equipment used in the food-services industry seems almost completely unrelated. Some shareholders have liked the diversification that the two businesses offer the company as a whole, reducing its overall vulnerability to economic downturns.

Yet Manitowoc has attracted the attention of activist investors who want to break the company into two parts. With investment company Relational Investors having taken a substantial stake in Manitowoc earlier this year, many investors bid shares sharply higher in the hopes that the sum of the parts would prove more valuable than the whole. Let's take a closer look at Manitowoc to learn whether the excitement among deal-hungry investors is justified.

Stats on Manitowoc

Source: S&P Capital IQ.

Why are activists interested in Manitowoc?

Breaking up large companies into smaller parts has been trendy on Wall Street in recent years, especially in situations in which one part of a business is markedly different from the rest. Manitowoc's businesses are already so functionally separate that moving forward with a formal split wouldn't be nearly as difficult as it would be with a company with more integrated operations across segments, and that was likely a big enticement for Relational Investors to step into the fray.

In late June, Relational Investors said that it had talked with Manitowoc's management and had recommended that the company spin off its food-services business into a separate public company. Not only does Relational Investors believe that realigning assets between the two businesses will make them both better investments, but it also thinks that improving margins and earnings will be easier once each division is free to pursue its own independent course. On the other hand, the firm thinks that as long as the two businesses stay glued together, Manitowoc stock will trade at a discount to what food-services specialist Middleby fetches, as the lower multiples that Caterpillar and other construction-centric companies will hold back the crane maker.

Source: Manitowoc.

For its part, Manitowoc has stated that it has listened to Relational Investors and will continue to do so, engaging in open dialogue. Yet the company has also reaffirmed its commitment to its existing business strategies, and some have read that as a sign that Manitowoc would prefer not to undergo a major corporate reorganization at this time.

Will macroeconomics bail out Manitowoc?

To a large extent, the success or failure of Relational Investors' bid might well lie in how quickly the global economy can recover from its recent doldrums. It's indisputable that Manitowoc, Caterpillar, and other players in the construction-equipment industry have suffered from sluggishness in formerly fast-growing areas of the world. For a long time, shares of Caterpillar remained stagnant, and it was easy to attribute Manitowoc's strong share-price performance to its food-service business.

If the macroeconomic winds shift in favor of global growth, though, then Manitowoc's crane business could become ascendant again. That wouldn't necessarily refute Relational Investors' position, as it could then argue that the crane business would perform better as a separate entity. Yet given the extent to which it has emphasized the food side of Manitowoc's dual business structure, Relational Investors might find it difficult to do an about-face in its position.

For now, Relational Investors still hopes to meet with Manitowoc's board of directors, and Manitowoc's stock has suffered in light of Caterpillar's weaker sales outlooks recently. If construction remains under pressure, then activist investors could eventually convince Manitowoc investors that its proposed course of action would be best for their total returns.