Minority investors question Omnova's performance

NEW YORK—Barington Capital Group L.P. has expressed its displeasure with the performance of Omnova Solutions Inc. in a letter sent to Kevin McMullen, Omnova's chairman and CEO, on Dec. 3.

The investment firm—which represents a group of shareholders that collectively own more than 2 percent of Omnova—said Omnova's shares have dramatically underperformed its peers and the market over the past one, three-, five- and 10-year periods and during McMullen's tenure as CEO.

“It is our belief that the company's poor share price performance reflects the market's dissatisfaction with Omnova's lack of strategic focus, disappointing return on invested capital and organic growth, frequent earnings shortfalls, and poor executive compensation and corporate governing practices,” James Mitarotonda, Barington chairman, president, CEO and co-founder, wrote.

Mitarotonda has served on the board of A. Schulman Inc., an industrial plastics company based in Akron, since 2005.

Mitarotonda said he would like the opportunity to discuss with McMullen solutions to enhance Omnova's profitability and share performance, including recommending independent directors to Omnova's board. He said Barington and Omnova representatives have had the chance to meet twice—in Boston on Sept. 8 and in Cleveland on Oct. 14.

Omnova released a statement on Dec. 3 in response to Barington's letter.

“The board of directors and management of Omnova Solutions are committed to act in the best interests of the company and all of its shareholders. As part of our continuing effort to maintain an open dialogue with our shareholders, we have had two recent meetings with Barington representatives to discuss their concerns and ideas,” McMullen said in a statement.

“We look forward to continuing our dialogue with shareholders as part of our process to help drive sustainable long term value,” the CEO added.

The investment firm recommended Omnova sell its Engineered Surfaces segment, citing low margins and inconsistent performance, as part of a strategy to rationalize Omnova's portfolio of business.

Other recommendations include investing in Omnova's sales force to help drive organic growth; make better use of excess liquidity, which Barington said amounted to $147 million in cash on hand; and improve Omnova's executive compensation and corporate governance.

Barington said that during McMullen's 14 years as CEO, Omnova has invested more than $535 million in capital expenditures and acquisitions. However, it has experienced a decline in the return in its invested capital every year since fiscal 2009—declining from 11.9 percent in 2009 to 6.4 percent in fiscal 2013.

“It is our belief that the company's disappointing return on invested capital is ultimately attributable to poor execution by its senior management team,” Mitarotonda wrote.

The investment firm criticized Omnova's decision to spend $17 million in what Barington branded a “showpiece” headquarters, given the firm's poor financial performance and weak returns to shareholders. Omnova recently relocated its Ohio headquarters from Fairlawn to Beachwood on Oct. 13.

“We believe that such resources would have been better invested in measures that have a higher likelihood of improving long-term shareholder value,” Mitarotonda wrote.

Omnova said in its statement that it is accelerating investment in its higher growth and higher margin specialty businesses, improving profitability of its traditional core businesses, and optimizing the structure and use of its capital—citing its recently announced share repurchase program and debt retirement actions.

“We are taking aggressive actions to strengthen the company,” McMullen said in a statement. “We continue to evaluate all options for generating improved shareholder value as we execute our performance improving strategy articulated in our third quarter earnings release.”

The investment firm recommends bringing in an independent chairman to separate the chairman/CEO role from McMullen. Mitarotonda wrote that Barington has identified several independent directors for Omnova to consider adding to its board, but it did not name anyone in the letter.

Barington said the board has awarded McMullen generous compensation packages—saying the CEO has received more than $28 million in total compensation compared to a total annualized shareholder return of 2.2 percent since McMullen became CEO.

Citing a report by Glass Lewis—a proxy advisory firm—Barington said Omnova's CEO compensation during the past fiscal year was more than four times the average compensation received by the other named executive officers.

Barington expressed displeasure with the board authorizing Omnova to pay McMullen almost $10 million in what it outlined as “golden parachute payments” should the CEO be involuntary terminated, and a provision that would allow McMullen to “retire and receive generous separation payments” if the board appointed an independent chairman.

Barington says it invests in undervalued publicly traded companies that it believes could appreciate significantly in value as a result of change in corporate strategy.

Omnova employs about 2,300 and produces emulsion polymers, specialty chemicals, and decorative and functional surfaces for a variety of commercial, industrial and residential end uses.