Jeffrey Smith, chief executive officer and chief investment officer at Starboard Value LP.
David Paul Morris | Bloomberg | Getty Images
A successful activist is gently pushing for change at a medical device company that could be a takeout candidate.
Company: Merit Medical Systems (MMSI)
- Business: A manufacturer and marketer of disposable medical devices used in a range of interventional, diagnostic and therapeutic medical procedures
- Stock market value: $2.4 billion ($44.99 per share)
Activist: Starboard Value
- Ownership: 9%
- Average Cost: $31.80
- Activist commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement.
What’s happening?
On May 26, Starboard and the company entered into an agreement pursuant to which four directors agreed to resign from the 10-person board and three new directors approved by the activist were added, effective at the 2020 annual meeting. Additionally, the company agreed to select a new lead independent director following the annual meeting and form a new operating committee, which will work with Merit’s management team to establish operating margin targets to be announced no later than the announcement of Merit’s third quarter 2020 financial results. The three new directors, along with the company’s CEO, will make up the operating committee.
Behind the scenes:
Starboard had been watching this stock and was given a good entry point when the stock went from $60.65 on June 17 to $24.15 on October 28 due to a revised growth outlook and declining profitability because of, among other things, execution issues with some of their recently acquired higher margin products and a large increase in expenses.
The company is a medical device company that specializes in peripheral intervention, cardiac intervention, breast cancer localization and endoscopy. Over the past several years, the company has put up high single digit to low double-digit organic growth by expanding its facilities, employees and strategic acquisitions. While its organic revenue growth has been on the higher end of its peers, this has not flowed through to profitability and the company’s 14.6% EBITDA margins have been on the lower end of its peers who have margins in the mid 20’s to low 30’s.
Fred Lampropoulos founded the company in 1987 and has been its chairman, CEO and president ever since. He has been focused on revenue growth and more recently on M&A and has done a great job in growing the company to where it is. However, he is still running the company more like an entrepreneur than a disciplined CEO and the company will benefit from a board and management team that is more focused on long-term profitability and margins. We have seen that founder-led companies like this are often activist targets because the visionaries who created the company may not be the best people to operate it when it gets to a certain size.
There is a lot of room for improvement here and Starboard has tremendous experience in improving operations from a board level, particularly at founder-led companies. A parallel opportunity is that the company could get sold. There has been a lot of consolidation in the medtech space and Lampropoulos is at an age, 70, where he might start thinking about an exit. Stryker acquired Wright Medical; CR Bard, one of Merit’s direct peers, was acquired by Becton Dickinson and over time, Teleflex has bought many companies in this space, leveraging those acquisitions into significant margin expansion. Merit’s attractive assets could be accretive to a larger strategic acquirer and could see tremendous upside as many of the other consolidations in the industry took place at 4-5 times revenue, while Merit is trading at approximately 2.5 times revenue today.
The only negative to the settlement is that Starboard was not able to get one of its principals appointed to the Board. Both Jeffrey Smith and Gavin Molinelli were nominees and would have been excellent choices given their experience in improving operations at founder-led companies.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio Manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
