Loeb’s FedEx Stake Heightens Focus on Smith Succession

Investor Dan Loeb's decision to take a stake in FedEx Corp. (FDX) is poised to heighten scrutiny of the role played by Fred Smith, who has run the airfreight company since its founding more than 40 years ago.

Even as Loeb has said he's not seeking a leadership change, his Third Point LLC hedge fund brings a history of activism to Memphis, Tennessee-based FedEx. Loeb, 51, has an effort under way now to replace the chief executive officer of Sotheby's (BID) and spurred the resignation of a Yahoo! Inc. executive in 2011.

"At some point Smith's career is going to come to an end, and the appearance of an activist is a reminder," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "Smith is a very overpowering figure. Loeb is an icon, too."

Smith, 69, holds the titles of chief executive officer, president and chairman at the world's largest cargo airline. He first described his concept for a reliable express airfreight carrier in a paper as a Yale University undergraduate and developed it while in the Marine Corps during the Vietnam War. The company began operating in 1971.

Along the way, Smith branched out into surface transportation by buying Caliber System Inc., which later became FedEx Ground, in 1998. He has maintained FedEx's classification of its drivers as independent contractors, unlike United Parcel Service Inc. (UPS)'s use of unionized employees.

Not Going

After signaling in 2010 he might leave as soon as 2013, Smith said last year "I'm not planning on going anyplace." He's overseeing a $1.7 billion plan to cut costs and boost earnings amid a shipping-market shift as customers opt for less-expensive options instead of overnight deliveries.

"We like the business," Loeb said Nov. 12 at the DealBook conference in New York, without specifying the size of his FedEx stake. He said he met with Smith last week in Memphis and won't push for his ouster.

Loeb's record ensures that executives will be mindful of his views even if he doesn't resort to an activist stance, Jim Corridore, a Standard & Poor's Capital IQ analyst in New York, said in an interview.

"I don't think that he always has to take agitation as a position -- sometimes you can just invest in a company," said Corridore, who reiterated his buy rating on Nov. 12 and projected FedEx would reach $180 within 12 months, 42 percent more than his previous target. "His mere presence on the list of shareholders will keep the company on its toes."

Share Performance

The shares rose 0.5 percent to $135.29 yesterday, extending this year's gain to 48 percent. That beat advances of 25 percent for the Standard & Poor's 500 Index and 37 percent for UPS, the biggest package-delivery company.

FedEx "has an effective process in place to select successors to the chairman of the board and other members of executive management," Jess Bunn, a spokesman, said in an e-mail. Smith "periodically" gives directors recommendations on successors, Bunn said.

FedEx has a history of promoting from within, and executives such as Chief Financial Officer Alan Graf are among possible successors to Smith, said S&P's Corridore. FedEx has no mandatory retirement age for CEO and Smith can keep his job as chairman until he turns 72.

"Fred's planning for succession is a point that has come up over the years," said Justin Yagerman, a Deutsche Bank AG analyst in New York who also has a buy recommendation on FedEx. "What the company's always said is that it has a deep bench."

Activists' Strategies

Activist funds generally acquire equity stakes in companies and try to force management and boards to make changes that boost share prices and investor returns. New York-based Third Point was founded by Loeb and this year disclosed stakes in companies including Sony, Nokia Oyj (NOK1V) and Sotheby's.

In this year's first half, activists' second-most-common strategy was the removal of a CEO, trailing only the quest for a board seat, according to data from Activist Insight, which tracks the industry. As recently as 2010, removing the CEO was sixth, the data show.

CEOs were replaced at Canadian Pacific Railway Ltd. (CP) and Procter & Gamble Co. (PG) after activist investor Bill Ackman pushed for shakeups. Greg Taxin's Clinton Group Inc. prompted management changes at Nutrisystem Inc. (NTRI) and Wet Seal Inc. (WTSL) in the past year.

Sotheby's adopted a shareholder-rights plan last month to protect itself from hostile takeovers after Loeb increased his stake in the auction house and called on the CEO to resign. Loeb didn't seek to dump CEOs after investments in Technicolor SA, Murphy Oil Corp. or Smurfit-Stone Container Corp.

Smith and FedEx should face less pressure than other Third Point targets because profits are improving and the CEO has agreed to a stock buyback program, Yagerman said.

"These are the two big things that activist investors are usually looking to agitate for," Yagerman said. For Loeb to take a stake is "a vote of confidence from someone who is held in high regard. The fact that he does want to keep Fred Smith in place lends credence to the way the company's managed right now."