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.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!