The water pumps business may not seem too exciting, but the fight over Flow International (Nasdaq: FLOW) is one that you won't want to miss! Daniel Loeb's Third Point LLC demanded for a second time this week that the company immediately put itself up for sale in a transaction that could be worth as much as $16 to $18 per share based on recent M&A multiples.

Putting the Pressure On

Daniel Loeb's Third Point LLC is New York hedge fund managing over $4.5 billion while achieving an impressive 28% average annual return since its inception. While less than 10% of his firm's assets are invested in shareholder activism strategies, Daniel Loeb is well known for his often-belligerent letters to management. In fact, there is an old adage among financial professionals: Daniel puts the "pistol" in epistolary!

That said, Third Point's letter to Flow International was no disappointment. The hedge fund first contacted the company back in February expressing concern that the costs associated with being a public company were too high given its relatively small scale of operations. Daniel also argued that given the retirement of CEO Stephen Light – the company's pin-up leader – Flow should pursue a sale rather than seek to continue operating independently under new leadership.

The Board's Response
Later that month, several Flow board members and executives flew to New York to meet with Daniel and other members of Third Point to discuss their ideas. While they appeared to be open to the idea at the time, Daniel was quickly disappointed with the pace and process of the board's follow-through. The company continued dodging questions related to the sale process until March 30th, when they finally announced that they had retained an anonymous investment bank to conduct a "capital markets review". Not only was the name of this mysterious investment bank kept a secret, but all of Flow's directors were advised not to speak with Daniel or other members of Third Point!

Naturally, Daniel then began questioning whether or not the directors took their fiduciary duties seriously or whether they were more concerned with protecting their ability to receive compensation as directors. He quickly discovered that not only Chairman Kathryn Munro but many other members of the board were in fact retirees who relied on their compensation as directors as their principle source of personal income! This could be a slight conflict of interest.

The Poison Pill and Issues that Lay Ahead

Even more troubling are the company's other measures in place to protect incumbent management and board directors. The most significant is a poison pill that prevents any single investor from acquiring too large of a stake, which prevents someone from obtaining too much voting power. The company also has staggered elections for their board of directors, making it impossible to take over the company's board in a single proxy fight. These only further prove the board's agenda of self-preservation.

So, what happens now? Well, Daniel Loeb demanded that the company immediately retain a publicly identifiable and well recognized investment bank, with a clear mandate to explore a possible sale of the company. Moreover, he also insisted that the company comply with best practices in corporate governance by removing its poison pill and de-staggering the election of its board. Finally, he concluded his letter by saying "do not make the mistake other have made by under-estimating my resolve in this matter. If you continue to disregard the will of the company's owners, I will seek to replace members of the board at the next annual meeting". Hopefully this will be enough for the company to work in the best interest of its shareholders and pursue a sale of the company.

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