3M’s CEO Swamped by a $50 Billion Stock Rout

Not many chief executive officers can oversee a more than $50 billion plunge in a company’s market value and keep their jobs. And yet 3M Co.’s Michael Roman is coming up on his five-year anniversary as CEO of the industrial conglomerate with no clear, imminent resolution to serious legal quagmires and no expectation that the company’s performance will improve materially anytime soon.The rout in 3M’s stock since Roman officially took over the top job in July 2018 is worse than the slide in Boeing Co. shares during the same period, which included two fatal crashes, a worldwide grounding of its best-selling 737 Max jet and a global pandemic that brought air travel to a virtual halt. It’s the second-worst performance by any member of the Dow Jones Industrial Average. 3M’s market capitalization is now about $60 billion — roughly what it was a decade ago even though the S&P 500 Index and the industrial subsector have both more than doubled in value.

To a large extent, Roman has been the victim of bad timing and poor decisions by previous 3M CEOs. The bulk of the decline in 3M’s market value during his tenure is linked to a pair of legal headaches over military earplugs and legacy manufacturing of per- and polyfluoroalkyl substances (PFAS) that have come to the forefront in recent years. 3M’s liability in these situations is at best uncertain and at worst a bottomless pit. But Roman has also made a bad habit out of earnings disappointments and guidance cuts. It remains puzzling that 3M, once known for its innovation and considered a safety stock during times of economic stress, is producing only pedestrian sales growth and lackluster profit margins. There’s always an excuse: the US-China trade war, the pandemic, currency swings, inflation, a weaker macroeconomic environment, exposure to a consumer sector that many other manufacturers have moved away from in recent years. But the nature and severity of the company’s misses are increasingly idiosyncratic. 3M, the maker of Post-it notes, automotive adhesives, roofing granules and consumer electronics components, is no longer the industrial bellwether that it once was.

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3M’s earplug and PFAS liabilities “are nearly impossible to build a range upon today,” Melius Research analyst Scott Davis wrote in a late January note after the company reported fourth-quarter results that fell short of expectations and issued a glum outlook for 2023. “But either way, the best way of managing the future call on cash is to deliver exceptional operating performance. Nothing today and nothing in the guide would imply that exceptional is happening though.”

Roman vowed in January to take “a deeper look at everything we do.” This includes cutting 2,500 manufacturing jobs as the company resets its production for lower demand. But it’s not clear why this round of cost cuts will be more successful at getting the company back on track than the restructuring initiatives Roman announced in April 2019, January 2020 and December 2020. Roman has also recently taken an ax to 3M’s conglomerate structure: The company in September completed a $5.3 billion deal that merged its food-safety unit with Neogen Corp. and is spinning off its health-care unit, a business that generated more than $8 billion in revenue last year. It’s possible that 3M’s leadership finds it easier to reset operations at a smaller company. A simpler 3M may also mean less earnings volatility. But these divestitures carry significantly less bang now than they might have when Roman first took the CEO job in 2018. At the moment, they frankly feel like an afterthought compared with 3M’s legal woes.

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Military veterans have contended that 3M knowingly sold defective earplugs through the Aearo Technologies subsidiary it acquired in 2008, leaving service members with hearing loss and tinnitus. Plaintiffs were increasingly winning bellwether trials before 3M announced in July that it would put the Aearo subsidiary into bankruptcy. The idea was that a settlement of the more than 200,000 pending claims could be reached faster if the lawsuits were consolidated in bankruptcy court rather than fought individually and that 3M could take advantage of the benefits of the bankruptcy system without having to blow up its own equity value or kneecap its other businesses. The strategy is controversial, and 3M has run into some roadblocks. A bankruptcy judge said in late August that 3M can’t use Aearo’s filing to halt jury trials over the earplugs. Separately, a federal appeals court last month rejected a similar (although legally different) effort from Johnson & Johnson to use the bankruptcy process for a specially created unit to resolve lawsuits over claims that its talc-based baby powder caused cancer. 3M has said that the earplugs were safe and effective and that it’s planning to appeal the cases it has lost as well as the bankruptcy judge’s ruling. But it’s essentially back at square one — or worse: Wolfe Research analyst Nigel Coe has estimated 3M is paying about $4 million a week in legal fees in connection with this issue.

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Based on the earplug verdicts to date, it’s possible to come up with astronomical estimates about 3M’s ultimate liability — numbers far in excess of its current market value. Analysts have said something in the ballpark of $8 billion to $15 billion is a more reasonable estimate.

But wait, there’s more. The company helped pioneer the use of PFAS in consumer and industrial products starting in the 1950s and manufactured varieties of the compounds for decades. PFAS are known as “forever chemicals” because they break down slowly in the environment and can accumulate in the body. 3M faces myriad lawsuits and regulatory pressure over claims that contaminated soil and drinking water have contributed to health problems in local communities. 3M announced in December that it would cease all production of PFAS (it phased out some of the more problematic kinds starting in 2000) and work to discontinue the use of the chemicals in its products by the end of 2025. This decision is unlikely to do much to mitigate 3M’s ultimate liabilities and is a far cry from an accountability moment. The Environmental Protection Agency in June released updated advisories that lowered the safe threshold for certain PFAS substances in drinking water to effectively zero and in August proposed designating some of these chemicals as hazardous substances under the federal Superfund law. Once finalized, the Superfund classification allows the EPA to force companies that caused PFAS pollution to pay for cleanup work — meaning legacy manufacturers such as 3M might be on the hook for a big bill sooner rather than later. Most analysts pencil in at least a $10 billion liability for PFAS at 3M.

But both the earplug and PFAS liabilities are still just guesswork at this point. As far as 3M’s stock is concerned, this is actually worse than if the company simply came out tomorrow and said it was paying $20 billion to make both issues go away. With so much uncertainty, it’s been hard to justify touching 3M’s stock — even among the activist investors who make their money targeting companies where things have gone awry. With so much market value lost in recent years, however, it’s only natural that 3M’s existing shareholder register might start to voice complaints. Bert Flossbach, co-founder of German mutual fund firm Flossbach von Storch AG, questioned whether it was time for new leadership in a late January letter to 3M, according to the Wall Street Journal. Flossbach’s firm has been a 3M shareholder since at least late 2012 and is now one of the company’s biggest investors, according to data compiled by Bloomberg. “We are in regular discussions with our shareholders and we always welcome their feedback,” a spokesman for 3M said.

A new CEO can’t magically fix 3M’s problems, and it’s not fair to blame Roman for PFAS and earplug liabilities that have been festering inside the company since well before his time at the top. But as I have written before about General Electric Co. and Boeing, truly challenging corporate turnarounds are often at least a three-person job: one (or more) CEOs to mess things up, one to lay bare all of the problems and one to start the real recovery. And the reality remains that some of 3M’s problems are of a more garden variety that an experienced manufacturing operator might be able to make more headway in addressing. “Not many CEOs can cut guidance four times in one year and live to tell the tale,” I wrote about Roman in 2019. Several years and tens of billions of dollars of lost market value later, he is still there.