Sunday, January 27, 2013

A Boardroom Battle at Aerojet Rocketdyne Clouds the Pentagon Supplier’s Future

Chairman and CEO are at odds, as crucial rocket-engine maker charts course after sale to Lockheed Martin collapsed

A boardroom battle at Aerojet Rocketdyne Holdings Inc. is playing out in lawsuits and clouding the future of the U.S. rocket engine maker, after the collapse of its planned $4.4 billion sale to Lockheed Martin Corp.

Aerojet is a supplier to defense companies and the National Aeronautics and Space Administration and is in the middle of an internal legal fight, pitting a board faction led by Aerojet Chief Executive Officer Eileen Drake against one headed by Warren Lichtenstein, the company’s executive chairman.

Mr. Lichtenstein, a veteran hedge-fund manager who has pursued activist campaigns at other companies, also heads an investment firm seeking control of Aerojet’s board.

The boardroom dispute became public after antitrust enforcers at the Federal Trade Commission in January sued to block the Lockheed Martin deal, which led the company to drop its bid for Aerojet on Feb. 13. The agency argued a deal would harm rival defense contractors and lead to unacceptable consolidation in markets critical to national security.

Ms. Drake and Mr. Lichtenstein both have three allies on the eight-member board, according to lawsuits the two competing factions filed against each other this month, indicating that the board is deadlocked. Both executives have denied the allegations leveled in a flurry of lawsuits between the board factions that they either tried to undermine the planned Lockheed deal or coming board nomination process.

“We are confident in our strategic plan and future performance and are poised to deliver substantial value to our shareholders,” said Ms. Drake in a statement alongside Aerojet’s quarterly results last week. Ms. Drake had no further comment.

Mr. Lichtenstein said via a representative that he is “completely aligned with fellow shareholders, and has operated with integrity and transparency throughout his tenure on the board.”

Aerojet is a supplier on multiple Pentagon programs including space, missile defense and cutting-edge technology such as hypersonic missiles that can fly at more than five times the speed of sound. The company reported a 7% rise in quarterly profits and record annual sales of $2.2 billion.

Lockheed Martin is Aerojet’s biggest customer, accounting for a third of sales, but its rocket motors are used on other military and commercial missiles and space vehicles developed by companies including Boeing Co. and Raytheon Technologies Corp.

El Segundo, Calif.-based Aerojet’s importance to national security was highlighted when the Pentagon last week issued an update on the state of defense suppliers, highlighting consolidation in the rocket motor sector as an area of concern. The Pentagon said the shrinking number of providers could stifle innovation and price competition and leave the military vulnerable to supply disruptions.

Aerojet is one of only two remaining U.S. makers of solid fuel rockets, which defense experts said are preferred because of their reliability and longevity compared with liquid-fueled motors. In 1990, there were eight, according to the Pentagon report. Orbital ATK Inc., the other large producer, was bought by Northrop Grumman Corp. in 2018.

Aerojet and Lockheed Martin had hoped to close their deal last year, but this was extended as the FTC challenged the proposed transaction. Aerojet’s stock price traded consistently below the $51-a-share offer price because of concerns the deal would be blocked by regulators. The company is valued at almost $3 billion, the shares closing Wednesday at $36.59.

Fissures on the board started to appear after the FTC sued to block the Lockheed Martin deal. On Feb. 1, Mr. Lichtenstein’s Steel Partners Holdings LP investment firm—which has a 5% stake in Aerojet—announced plans to launch a proxy contest to replace some directors, including Ms. Drake. Mr. Lichtenstein is also executive chairman of Steel Partners.

Aerojet on the same day announced that it had previously launched an internal investigation into Mr. Lichtenstein, focused on his communications about the proposed Lockheed deal. The company said the investigation also targeted alleged instances of Mr. Lichtenstein pressuring executives to make changes to financial forecasts as far back as 2020, according to a legal filing.

On Feb. 8, Mr. Lichtenstein and his three board allies sued Ms. Drake and the other three Aerojet directors over the conduct of the next board election.

Ms. Drake has been Aerojet’s CEO since 2015, having previously worked at United Technologies Corp. and Ford Motor Co. She and the three other board members filed a countersuit on Feb. 11.

That suit argued that Mr. Lichtenstein and his camp—Aerojet directors James Henderson, Audrey McNiff, and Martin Turchin —have mounted a “boardroom coup.” It said they were seeking to remove Ms. Drake and lock in Mr. Lichtenstein’s place on the board, despite the continuing internal investigation.

A Delaware judge on Feb. 15 approved a request from Mr. Lichtenstein for a temporary restraining order against Ms. Drake and three board members—Kevin Chilton, Thomas Corcoran and Lance Lord. The order barred them from being able to speak on behalf of Aerojet or use its resources in the coming board election. Aerojet has traditionally held its annual meeting in May, though no 2022 date has been set.

Mr. Lichtenstein has been executive chairman of Aerojet since 2016. He has invested in the company and its predecessors since 2000, and his hedge funds have a history of activism, including a successful proxy battle at Aerojet, then called GenCorp, in 2010.

In legal filings, a spokeswoman for Mr. Lichtenstein said he and his allied directors “looked forward to exposing any and all unsubstantiated allegations,” and that they supported the Lockheed Martin deal up until its termination. Mr. Lichtenstein said he was cooperating with the internal probe.

An Aerojet spokesman declined to comment on behalf of Mr. Chilton, Mr. Corcoran and Mr. Lord. A legal representative for the directors didn’t return a request for comment.

The boardroom uncertainty reduces the chances of another suitor approaching Aerojet, said Seth Seifman, aerospace analyst at JPMorgan Chase & Co.

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