NEW YORK ( TheStreet) - Timken ( TKR) said on Monday it has set up a board committee to evaluate the separation of the company's steel business from its other manufacturing operations.

Timken's decision company comes after hedge fund Relational Investors won a shareholder proposal to split the company's businesses in May. The Canton, Ohio-based company has hired Goldman Sachs ( GS) to conduct the board review.

In a press release, Timken said the special committee should come to a decision on its strategic review by the end of the third quarter. The board committee will consist of independent and non-Timken family Board members, Timken said in a statement. Lead independent director Joseph W. Ralston will chair Timken's special committee.

In statement released Monday, Ralston said the committee is "carefully evaluating options related to corporate structure as well as shareholder input on corporate governance and capital allocation." It adds Timken "will continue implementing its current strategy to further improve shareholder returns while remaining focused on serving and creating value for customers."

Relational Investors won approval for its shareholder proposal at Timken's annual shareholder meeting on May 7 and had the support of other key shareholders such as the California State Teachers' Retirement System (CalSTRS). Relational's proposal received support from about 53% of Timken's shareholders.

Relational argued a split of Timken's steel business, which accounts for about a third of the company's overall revenue, would create value for investors given stagnant share prices over the past two years.

Timken, however, argued the company's steel business would not have the financial health as an independent concern to compete in the marketplace. Meanwhile, some analysts expect a bottoming in Timken's performance in the second half of 2013 after an overall industrials industry slowdown over the past several quarters.

In a June 5 note to clients, Jefferies analyst Stephen Volkmann valued the sum of Timken's disparate metals and manufacturing businesses at over $60 a share. The analyst also saw the prospect of a significant increase to Timken's share repurchase authorization and its dividend.

"Even without a spin, TKR has significant excess liquidity and free cashflow will accelerate meaningfully over the next two years as capital spending andpension funding needs fade. We believe TKR could double its current dividendand repurchase 20+% of outstanding stock without stressing the balance sheet," Volkmann wrote.

Timken shares are up over 20% year-to-date. Shares gained over 2% in after-hours trading on Monday after the company disclosed the formation of its special committee.

-- Written by Antoine Gara in New York