Contents Under Pressure

In 1869, H.J. Heinz launched his company with just one product: horseradish.

At that time, he wasn't even selling ketchup, let alone such global kitchen brands as Bagel Bites, Ore-Ida and Wyler's. Heinz started with one product and one crucial idea ... transparency.

His competitors often used green vessels to hide the fillers that were inside. But Heinz knew his product was pure, and he wanted customers to know it, too. So he packaged it in a clear glass jar.

Heinz must have known what he was doing. His company has grown from one product line in 1869 to 1,300 today. Heinz now posts $2.5 billion in sales each year, with a brand as recognizable as any in the world.

But the future is no longer as clear as Heinz's horseradish jars.

On Aug. 16, Heinz shareholders will gather in Pittsburgh for the company's annual meeting. There, the company's board of directors will try to fend off one of the ugliest fights to have taken place in corporate America in the past several years.

Their opponent: Nelson Peltz.

A former corporate raider whose company, Trian Fund Management, now owns more than 5 percent of Heinz's stock, Peltz has been rattling Heinz like a child shaking a bottle of ketchup over his hot dog.

Heinz used to sell ketchup with the song "Anticipation," but like a lot of shareholders, Peltz is tired of waiting for the goods. In recent years, the company has gone through feverish deal-making and repeated rounds of restructuring. While Heinz has remained profitable, says Brady Willett, a private investor and editor of the Wall Street Wish List business bulletin, "they were somewhat underperforming."

Peltz's solution is to raise share prices now, with a massive cost-cutting plan that would likely entail sizable job cuts. Peltz also wants seats on Heinz's 12-member board of directors for himself and four others ... all of whom have close ties to Peltz. Heinz has rejected Peltz's previous efforts to install supporters on the board. So Peltz is waging what's called a "proxy fight," in which an outside party tries to gain control of a company by appealing directly to its shareholders [see sidebar, "Squeeze Play"].

Not surprisingly, Peltz's bid is being met with fierce resistance from Heinz and its chairman and CEO, William Johnson. The company's plan to boost earnings "has momentum, is working and will continue to work," says company spokesman Michael Mullen. "What the company didn't need at this time was a distraction like this attempt to put that slate on the Heinz board."

Heinz managers "were on the right track, slowly but surely, to eventually raising their stock price," Willett agrees. And then "out of nowhere comes Nelson Peltz, who shakes the whole thing up."

Pittsburgh civic leaders are shaken as well. Trian insists that it wants to keep Heinz headquartered in Pittsburgh, but not everyone believes it. And some suspect that helping shareholders may cost some Pittsburghers their jobs.

"This fight goes beyond Heinz," says Kevin Evanto, spokesman for Allegheny County Chief Executive Dan Onorato. "We want to make sure that the right information from both sides is being disseminated to shareholders and residents.

"Not only can't we afford to lose another corporate headquarters, but imagine Pittsburgh and Allegheny County without Heinz."







From the beginning, H.J. Heinz's imagination stretched well beyond Pittsburgh. That's why he expanded the product line, and why in 1886 he began taking his company global by selling his wares in England.

Today the company has 41,000 employees working at more than 110 major locations worldwide, including 1,200 in Pittsburgh. Key to that expansion has been the company's aggressive deal-making and acquisitions. Some of those deals, like Heinz's pick-up of the A-1 Steak Sauce label, were natural purchases for Heinz, says Willett. But others ... Willett cites the purchase and later resale of Weight Watchers ... have been major headaches. Since the late 1990s, the company has gone through four major restructurings and is now on its fifth, a symptom of a company that lost its way and has struggled to find it again.

Company performance has lagged throughout. In March 1998, Heinz stock was selling at $54 a share; on March 1 of this year ... just before the Peltz flap began ... the stock was trading at $37 a share.

"Mergers and acquisitions ... give you an opportunity for growth," says Wall Street Wish List's Willett. "But the problem is, they're not picking up the slack on the bottom line.

"That's why Nelson Peltz got involved."

In the run-up to the Aug. 16 annual meeting, both Heinz and Peltz's Trian were limiting interviews by key participants. And while Heinz's Mullen immediately agreed to an interview, Trian's Carrie Bloom originally directed all questions to the Trian Web site (enhanceheinz.com). Only later did Bloom agree to answer questions submitted in writing.

According to the plan Trian has submitted to shareholders, "We believe the disappointing shareholder returns at Heinz are a result of management's inability to grow the business and have a focused strategy. ... [W]e also believe shareholder value has been destroyed through a series of ill-fated divestitures and acquisitions, failed corporate restructurings and poor capital allocation decisions."

Peltz's solution involves using company cash to buy back 43 million shares, a purchase that will help boost shareholder prices. At current prices, the cost of that purchase could be as high as $1.8 billion. To make that purchase, and streamline operations in the long run, Peltz proposes cutting costs by $575 million a year, and reducing by $300 million the amount the company spends on deal-making. The money would be plowed instead into focusing on key brands and developing new ones.

Such cuts, says Mullen, "would have a very dramatic effect on this company. ... If we were to pursue the crippling cost reductions proposed by Nelson Peltz, "it would seriously affect our involvement in the community, it would affect the 1,200 employees directly employed by Heinz in the city and another 5,000 employed in services related to Heinz.

"We're confident that if the shareholders examine both plans, that they'll realize that this is the best plan for the company and for the city of Pittsburgh."

In fact, Heinz has responded to Peltz by proposing cuts of its own. To compete for the affection of shareholders, Heinz has touted its own plan ... already underway ... to buy back $1 billion in shares, and increase yearly dividends to stockholders by 16.7 percent. The company is proposing cutting $355 million from its operations over the next two years, cuts that would necessitate closing 15 plants worldwide and trimming 2,700 jobs, none in Pittsburgh.

When you get right down to it, says Dr. Robert Dammon, a professor of financial economics at Carnegie Mellon's Tepper School of Business, there doesn't seem to be dramatic differences between the two plans, except for Trian's deeper, immediate half-billion dollar cuts. Heinz management, he says, was already working toward restructuring the company, improving the stock price and cutting expenses.

There are at least some indications that the company is beginning to right itself. In June, Heinz announced fourth-quarter results that showed earnings just under $180 million. That was well below the $206 million the company earned at the same time last year, but it's higher than its previous-quarter earnings of $116 million. And Willett says Heinz seems to be heading down the right track with its most recent restructuring ... the fifth since the late 1990s. It's already dumped a lot of its speculative, underperforming brands.

"I just don't see a huge difference in the two plans being put up," Dammon says. "If you look at Trian's plan, you're not getting a significant additional amount of valuation ... than you're getting in the Heinz plan.

"So then when you get down to it, the major difference between these two groups is who's going to be running the show in the boardroom."







Under the Peltz plan, the show could be run by Peltz and a small group of allies.

Peltz's slate of directors include: Peltz himself; Peter May, Peltz's longtime friend and business partner; Trian portfolio manager and Peltz's son-in-law Edward Garden; INOV8 Beverage Chairman Michael Weinstein; and pro golfer Greg Norman. Heinz and observers say all of the men are either related to or friends of Peltz.

Heinz has had several opportunities to end the dispute by agreeing to accept at least some of Trian's slate on its board, both the company and Trian agree.

And Heinz has reached out to other major investors. To make peace and to curry support for the upcoming vote, Heinz made several concessions to the California Public Employees' Retirement System (CalPERS), which holds 2.5 million shares of Heinz stock (a fraction of the 18 million-plus shares owned by Trian). Heinz agreed to add two new independent directors to the board. Heinz has also agreed to hold regular meetings between the Heinz board and key shareholders, like CalPERS and Peltz's Trian. Another provision makes it easier to change company bylaws, lowering the threshold of votes necessary from 80 percent of shares to 60 percent of shares.

All of those concessions are intended to give shareholders more control over the company. But Heinz has maintained throughout that those new directors would never come from Nelson Peltz's slate: The new directors are likely to be recruited by an independent director-search firm.

"If you look at the Peltz slate, it reads like a party invitation to his friends, relatives and co-workers," Mullen contends. "Do you know what the main qualifications of his nominees are? Being tied to Nelson Peltz. Who would hold him accountable with a voting bloc like this? ... Heinz shareholders deserve independent directors, not directors who are there to serve Mr. Peltz's best interests."

Trian has said all of its candidates are experienced and would be independent directors working for the betterment of the company. "We are not looking to take over Heinz's Board of Directors," Trian insists in its filings. "Our Nominees' goals, as directors, will be to work with Heinz's management and other members of the Board to ensure that the great assets of this Company are not further wasted. Our Nominees will seek to ensure ... that management is held accountable for achieving stated goals and objectives."

Trian also argues that shareholders have reason to distrust current company management.

"[G]iven management's track record to date in executing Heinz's five prior [restructuring] plans, and despite the [Heinz] Board's decision ... to reject Trian Group's request for minority Board representation, the Trian Group believes that it is in the best interest of all Heinz shareholders that its nominees be appointed or elected to the Board in order to hold management accountable."

Without question, Peltz has a track record of turning companies around. He turned a $300 million purchase of Snapple into a $1.5 billion sale three years after the purchase. He has made a career of buying companies and selling them at a profit to shareholders and to his company, Triarc, which owns the Arby's chain of restaurants.

However, according to Nell Minow, Peltz also comes with another label: corporate thug.

"I think the reputation of Trian is a thuggish one," says Minow, editor of the Corporate Library, an independent research firm specializing in corporate governance. "To be honest, I believe they have very limited credibility because of the way they operate. To put up a slate of five directors that are so closely connected shows me that they're not out for the good of all shareholders, but rather for themselves."

At Wendy's for example, Peltz entered the company much the same way Trian entered Heinz ... with a lot of noise, a plan and demands. Wendy's quickly agreed to a number of concessions, including the addition of three Trian-backed directors to its board.

Published reports have also documented Peltz's past problems in dealing with shareholders. According to the Pittsburgh Post-Gazette, Peltz bought and merged National Can Company and American Can in the 1980s, only to sell them for an $800 million profit in 1988. That sale, the paper reported, resulted in shareholder lawsuits claiming Peltz cheated them after having "unfairly bought them out just months beforehand." Peltz denied the allegation, but settled the lawsuit without admitting any impropriety for $75 million.

Brady Willett says he has heard words like "thuggish" to describe Nelson Peltz in the past. He doesn't necessarily agree that the label fits, but he also doesn't see it as a negative.

Peltz is "aggressive, and that sometimes comes off as reckless and thuggish," Willett says. "But as a shareholder, I love it because a guy like that makes me money. I love it when I see someone going into a company and knocking heads together. Yes, Heinz was moving forward, but once those heads started knocking together, they picked up the pace." Heinz stock was trading at $42 the week before this issue went to press ... up $5 a share from its price in early March.

"We bought Heinz stock last year and settled in for the long term, hoping to get at best a 5 percent return on our investment," says Willett. "But since the entire Peltz situation took root, the price shot up and we sold it giving us an almost immediate 10 percent return on our investment off of speculative frenzy.

"Is Nelson Peltz going to get five seats on the Heinz board?" Willett asks. "I don't know. But it really doesn't matter because look at what's going on in that company; he's already won. Instead of fighting him, they should be thanking him."

Minow says Trian has already gotten all it's going to get out of Heinz management in the way of concessions from the company's own restructuring plan. Regardless of whether Heinz credits Peltz's group for the changes, he is at least partially responsible, she says. Peltz, then, should take pride in his victory ... and drop his quest for five board seats to be filled by his own nominees.

But that seems unlikely, observers say.

"I don't think [this] thing has any chance of being settled with just a couple weeks to go," says CMU's Dammon. "Plus it's gotten so nasty, I couldn't see Heinz say, 'OK, two or three of these guys would be acceptable.'"

"If Trian was out for the shareholder, they wouldn't want those board seats; they would want them to be truly independent," Minow says. "They would want a slate of directors that added instant credibility to their cause. I've been in this position before and that's what I've wanted. ... The only thing I can think they're still hanging in this for is some go-away money."

And even though Minow says she expects Heinz to survive this attack, she says Heinz is unlikely to shed the image as a company under siege. On the contrary, she and Dammon agree, the company's problems are likely just beginning.

Following a proxy fight, a company normally changes senior management, and often it becomes an even bigger target for purchase or hostile takeover. Once a company is weakened by a long and vicious proxy fight, it's hard to keep the sharks away.

"It's like an engraved invitation for anyone to come in and gain the attention of the shareholders," Minow explains. "Maybe the shareholders didn't want Trian, but if someone else came in and made a play with a better deal for them, they may be ready to change alliances very quickly.

"This has been a tough fight and there's a lot of blood in the water. And in corporate America, that makes you a big target."







Heinz executives aren't the only ones worrying about that outcome, or about what Nelson Peltz might do if he gained the leverage he wants on company's board. Local leaders are anxious as well.

Trian's Web site insists the fund has "no intention of moving Heinz from Pittsburgh, where it has had an important corporate presence for 137 years." It's a claim the company, and spokesperson Carrie Bloom, makes repeatedly.

Bloom does concede, however, that job cuts in the short term are likely.

"Trian believes improving sales and profitability at Heinz is very important," Bloom says. "This requires spending more on marketing and bringing costs down, which could mean cutting jobs at least in the short term. However, for the longer term, our experience has been that there has been job creation once sales growth is re-established."

Such assurances haven't satisfied everyone.

"We know what they're saying," says Kevin Evanto, spokesman for Dan Onorato. "But if you look at that plan ... cutting $575 million, including $400 million in selling and administrative cuts ... I don't think you could cut every single general and administrative job in the company and save $400 million.

"Mr. Peltz has made comments that he has no interest in moving Heinz out of Pittsburgh, but I think that plan indicates otherwise."

The fear comes from Peltz's reputation as a corporate raider who buys companies and flips them for a profit. Selling Heinz to a rival firm, after all, might entail moving corporate headquarters outside the city.

Peltz's previous dealings have added to the local uncertainty. Evanto says Onorato and Pittsburgh Mayor Bob O'Connor have sent a letter to state Attorney General Tom Corbett, asking him to insure that shareholders and residents have "accurate and complete information when it comes to the motives of the Trian Group and Nelson Peltz."

But Evanto acknowledges that public officials across the region remain uneasy, in no small part because they have so little control over the outcome of the Aug. 16 vote. "At the end of the day, it's the shareholders who have to make the decision," he says. "It's up to them to make sure it's the right choice for the future of the company and the region."

That may not be good news for those working for Heinz in Pittsburgh ... or in Atlanta; Cedar Rapids, Iowa; Dublin; Paris; and Milan. As proxy votes continue pouring in, there's likely only one motivation guiding their decision.

"When you're an investor," says Willett, "the whole underlying goal, the only reason you're doing this, is to make money. That's it."





Squeeze Play

How proxy fights work



Proxy fights can have many different outcomes, but they all have one thing in common. Shareholders want to be involved when they don't believe a company is performing up to expectations, says Dr. Robert Dammon, professor of financial economics at Carnegie Mellon's Tepper School of Business.



"You'll find that companies that are targets of proxy fights have performed rather poorly in stock price performance," says Dammon, who teaches a course on corporate restructuring. "The thing is, very few proxy fights ... maybe 25 to 35 percent ... are actually successful."



In a proxy vote, management and an outsider seeking to shake things up ... in this case Heinz and Trian, respectively ... poll shareholders in a referendum. In the Heinz battle, eligible shareholders have received multiple copies of color-coded cards to indicate which group they support: white for the current Heinz management, gold for Trian. Shareholders can vote as often as they like (online, by telephone or through the mail) and change their minds at whim. But only the last vote will be counted. Votes are weighted according to the number of shares each investor holds.



Proxy fights and shareholder attempts to unseat board members have been on the rise since 2000. Some notable recent proxy fights and their outcomes:



Hewlett Packard: The company waged a month-long proxy fight to take over rival Compaq for $19 billion in 2002. Then-CEO Carley Fiorina pushed the company toward the Compaq takeover, only to be fired three years later "because she failed to execute a planned strategy of slashing costs and boosting revenue as quickly as directors had hoped," according to the Associated Press at the time.



Lonestar Steakhouse: In 2001, then-CEO and Chairman of the Board Jamie Coulter was ousted from the board when a dissident director, Guy Adams, won Coulter's seat on the board in a proxy fight. A year later, the company was bought out for $579 million and turned into a private company. Adams has also won two other board seats by waging proxy fights.



Oracle: An 18-month battle between Oracle and software developer Peoplesoft ended in 2004 with a $10 billion takeover of Peoplesoft. The tide turned for Oracle when, despite resistance from Peoplesoft's board, shareholders backed the takeover effort.



Time Warner: Last year, investor Carl Icahn launched a proxy fight for board seats against Time Warner. He dropped the fight, however, when the company's board agreed to accept some of his recommendations.



General Motors: Earlier this year, 88-year-old investor Kirk Kerkorian managed to secure an ally a seat on the GM board ... merely by threatening to wage a proxy fight.



Just because a proxy fight may fail to get dissident directors seated doesn't mean it's a complete failure, Dammon says. A target company, he says, is actually forced to re-examine the way it is doing business, to reassess its strategy.



"When the proxy battle is waged, most companies begin to perform more efficiently, and some do see an increase in stock price," Dammon says.



Often, he says, "[M]anagement receives a wake-up call and begins to realize that things can be run differently and begins to make viable changes to the corporate strategy." And if management doesn't take the hint, "In some cases, the current board decides that, even though they survived the battle, some changes should be made and replaces existing management anyway. And finally, companies that are targets usually come out of these battles ... ripe for sale or corporate takeover with a higher premium price attached."



Things are likely to change at Heinz in any case: Dammon says fewer than 20 percent of firms targeted by a proxy fight remained independent publicly held companies under the same management. Positive stock-price reactions to proxy contests, he says, are due to anticipation of management changes or subsequent takeover activity, even if the contests are not successful.

"So winning or losing a proxy fight doesn't always matter," Dammon says. "Even those that are unsuccessful often result in the company performing better."