Last week’s announcement that PulteGroup CEO Richard Dugas will step down next year was accompanied by a flurry of statements. Here are excerpts from three:
“I told Richard early on in his tenure that I intended to allow him to own and drive PulteGroup’s operations and strategy and not to insert myself into the day-to-day operations of the company. Unfortunately, Richard Dugas’ lack of performance and repeated bad decision-making has led me to conclude that the company needs new leadership.”
—- William Pulte, founder of Pulte Homes and PulteGroup’s largest shareholder in a letter to investors
“While we have significant respect for Mr. Pulte as the founder of PulteGroup, we believe his campaign is misguided and is not in the best interests of shareholders. In addition, we want to reassure our shareholders that the Board stands firmly behind the Company’s Value Creation strategy, which has produced significantly higher profitability and shareholder returns since Richard Dugas, our CEO, and his team began implementing it in 2011.”
—- James J. Postl, lead independent director for PulteGroup in a letter to shareholders
“(The appointment of director and Pulte family ally Jim Grosfeld) was very much described … as a help not a hijack. Before this time, Mr. Pulte had always been incredibly supportive. I have no idea why this is coming up now.”
—- Richard Dugas, PulteGroup chairman and CEO, in an interview Wednesday
A headquarters move to Atlanta may have lit the match.
But there was plenty of kindling to feed the firestorm last week that singed homebuilder PulteGroup’s chief executive, its board of directors and its largest shareholder.
The founding family of PulteGroup, the nation’s third-largest homebuilder, is locked in an unusually public brawl with the company’s top leadership. With 9 percent of PulteGroup’s stock, company founder William Pulte, 83, is the company’s largest shareholder.
His move to force Chairman and CEO Richard Dugas, 50, into early retirement spawned a flurry of accusatory letters and media statements issued by crisis PR firms.
Both sides acknowledge the Dugas-led decision to move to Atlanta from metro Detroit two years ago helped spark the squabble.
The move was “a waste of money” and meant “hundreds of people lost their jobs” at the Michigan headquarters, said Bill Pulte, the founder’s grandson, who runs a private equity firm in Bloomfield Hills, Mich. But he added the family isn’t seeking to undo it.
“We are very committed to Atlanta,” Bill Pulte said.
Insiders and industry analysts say the roots of the fight go deeper, to the company’s operating strategy and financial performance during Dugas’ 13-year tenure.
Dugas and PulteGroup’s board defended the Atlanta move and contend the CEO's record is good, especially since 2011 when he launched a strategy to deliver steadier financial performance.
Vicki Bryan, a senior analyst who follows PulteGroup debt issues for New York firm GimmeCredit, said she believes the Pulte family has watched with growing concern as the company spent money on share buy-backs and the headquarters move, while slipping to third place behind rivals Lennar and D.R. Horton.
PulteGroup shares are about 40 percent below their high a decade ago, while rivals’ shares have largely recovered from their crash during the Great Recession.
“I don’t think that these conversations just erupted,” said Bryan. “This [dispute] has been going on for a while” and it’s turned into something “unseemly,” she said.
“Money tends to get the blood up, but even considering that, this is unusual.”
Pulte and his grandson say they wanted Dugas to leave more quickly than the announced May 2017 exit date. They're also upset that PulteGroup's board will not renominate Jim Grosfeld, a one-time CEO of the company who is the family's chief ally on the board and helped them force out Dugas. Grosfeld had joined the board in December at their behest. They want more seats on the board now.
“It’s not personal,” said Pulte, the grandson, but “now is the time to do something, and our patience is running thin.”
“A lot of the other (homebuilders) have had a rebound in their stock price,” their profits and the numbers of homes they are building, he said. “Pulte has been one of the only ones that has been flat over the last two or three years by those metrics,” he added.
On the other side, PulteGroup’s board called the family’s push “misguided” and said it’s been happy with Dugas’ leadership.
“We want to reassure our shareholders that the board stands firmly behind (Dugas’ strategy), which has produced significantly higher profitability since (he) and his team began implementing it in 2011,” the board said last week in a letter to shareholders.
For his part Dugas — who has quickly built a high civic profile in Atlanta — says he was blindsided by the Pulte family's attack.
The first time he heard of any concerns about the company’s performance, he said, was late last year when the Pulte family asked that Grosfeld be appointed as an independent director.
The elder Pulte suggested that bringing in the experienced homebuilder “could help us with good ideas,” Dugas said. “It was very much described as a help, not a hijack.”
Before that, “Mr. Pulte had always been incredibly supportive,” he said. “I have no idea why this is coming up now.”
The tensions came into the open on March 21, when William and Bill Pulte, along with Grosfeld, met with Dugas to demand his departure. That angered the rest of the board, whose lead independent member, James Postl, last week issued an account of the meeting and accused Grosfeld of "unacceptable behavior" for participating without other directors' knowledge.
PulteGroup shares initially tumbled almost 10 percent last week before recovering most of that.
Credit Suisse analyst Michael Dahl said in a report that the family could strong-arm management into a risky growth push at the wrong time, when land prices for new subdivisions are high. Costly investments now could make the company vulnerable in a future downturn of the housing market.
“We find it difficult to see a clear ‘best’ outcome here,” he said.
Battle of generations
At the center of the dispute are two men of different generations who were each something of boy wonders.
William J. Pulte was 18 when, in 1950, he ripped a floor plan from the Home of the Week section of the Detroit Times and, with five high school buddies, built a five-room bungalow near Detroit’s airport. They sold it for $10,000, according to a company history on PulteGroup’s website. Soon, Pulte started his own company.
By the time Pulte stepped down as chairman 48 years later, his company was the largest homebuilder in the United States and he was its largest shareholder. Four years later, after rival D.R. Horton eclipsed his company, Pulte returned in 2002 as chairman.
Meanwhile, Dugas was plucked from the company’s Atlanta office and moved to corporate headquarters. A year later, Dugas was in the driver’s seat. Only 38 when he was named PulteGroup’s CEO in 2003, he was then the youngest CEO at a Fortune 500 company.
Like all homebuilders, PulteGroup was badly burned by the housing crisis that hit four years later. By 2009, $10 billion of the company’s annual revenue had evaporated, from a peak of $14.3 billion in 2006.
PulteGroup’s problems were compounded, industry analysts say, by poor timing. Dugas steered the company into a $1.4 billion deal in 2009 with rival Centex Corp., temporarily returning the company to the top of the homebuilder ranks.
Pulte, then 77, retired for good from his chairman’s job in 2009, accepting $4.4 million in consulting fees and other payments. Dugas added chairman to his CEO title.
But, partly due to financial baggage from the Centex deal, PulteGroup reported losses of $6.2 billion from 2007 to 2011.
Then Dugas changed the company’s course, embarking on what he called the Value Creation Strategy — tighter spending controls, more stock buy-backs and fewer “spec” homes. The aim was consistent financial performance through the boom-and-bust swings of the housing market.
‘Growth for growth’s sake’
“Our industry tends to pursue growth for growth’s sake,” said Dugas. “Investors want a homebuilder that operates with a very balanced strategy and one that returns capital to shareholders.”
He also advocated for the Atlanta move, which PulteGroup said put the headquarters closer to sunbelt markets. It created significant turnover and left some ill will in Michigan, but Dugas contends he has a top-flight team in Atlanta and morale is high.
Meanwhile the more conservative strategy has allowed the company to buy back stock — a move that usually pleases shareholders — and to keep debt relatively low compared to its rivals, say industry analysts. PulteGroup was also able to tap the large inventory of lots and land that came with its Centex acquisition, they say.
But Pulte volumes began lagging as it ran low on land to build new subdivisions, analysts say. That put it at a disadvantage as building recovered. Pulte’s rivals once again eclipsed the company.
Last December, PulteGroup bought Atlanta-based John Wieland Homes — one of metro Atlanta’s best-known nameplates — in a $450 million deal that will boost its land inventory. But it had to borrow the money after using almost $1 billion in cash last year to cover buy-backs, dividends and other expenses, GimmeCredit’s Bryan said.
Now Pulte is in something of a “catch-22,” said Dahl, of Credit Suisse. The more aggressive strategy the Pulte family wants “would have been a better discussion to have several years earlier.”
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