1) Synergies of integration are minimal and are significantly lower than current trading discount.
In the November 29 th press release response to our proposal, the Company claimed that there are substantial synergies between its Bearings and Steel Businesses, particularly driven by selling synergies and shared material knowledge. This argument was not repeated on the Company’s January 24 th earnings call. Our extensive analysis shows that the cost benefits and revenue synergies between the businesses are minimal. During both our meetings we asked management to quantify the synergies between the Bearings and Steel Businesses. As you know, management was unable to quantify any meaningful benefits during those meetings or in subsequent public communications with investors. SKF (Swedish Exchange, ticker: SKFB), one of Timken’s closest public bearings peers has excelled operationally and its shareholders have been rewarded since the company divested its vertically integrated steel business, Ovako, in 2005. We are confident that any small cost benefits or revenue synergies that may exist can be maintained following the split through joint venture agreements covering R&D spending, material procurement, combined selling, and/or any other business functions. These agreements have been used successfully before, including by SKF and Ovako. Additionally, Timken’s bearings operations are predominately located outside of Ohio and are not directly integrated with the steel facilities.
Incremental executive compensation required to operate both businesses independently, in our view, would be minimal. Timken already effectively pays two CEOs. In 2011, President and CEO Jim Griffith made $13M and you, the founder’s great-great grandson made $9M for serving as “Executive Chairman, ” an amount that appears to be dramatically out of line with standard industry compensation for similar “executives”, as discussed in detail below. In fact, the excessive compensation you received can be used to substantially offset the cost of adding a second executive team.