Starboard Value LLC’s Jeff Smith late on Monday, Jan. 13, suggested in a securities filing that he may communicate with Merit Medical Systems Inc. (MMSI) about potential business combinations or dispositions as well as a variety of other issues at the medical device manufacturer and distributor.
The comments were included in an activist Schedule 13D filing reporting that Starboard had accumulated a 9% Merit Medical stake, becoming the third-largest investor in the company with a $2.1 billion market capitalization.
In its campaigns, Starboard often targets founder-CEOs for replacement at companies it believes are underperforming and could be acquired. Merit’s chairman and CEO, Fred Lampropoulos, 70, founded the company in 1987. Its smaller market capitalization and a lack of share price performance in recent years suggests Smith and Starboard could push for Lampropoulos’ replacement.
Smith often launches director fights or takes other actions to drive M&A, share price improvement, CEO replacement and other goals at target corporations. A boardroom battle therefore is a real possibility at Merit. The fund would need to nominate directors by a Jan. 24 deadline for an annual meeting in May if it wanted to launch a proxy fight then. Alternatively, Smith could try to call a special shareholder meeting, considering that investors with a 10% stake can call a meeting.
The fund also reported signing a joint filing agreement set up on Wednesday between Starboard, Smith and Wendy DiCicco, an independent director at EyePoint Pharmaceuticals Inc. (EYPT) and privately held Carmell Therapeutics. Starboard often nominates individuals it signs cooperation agreements with as director candidates in boardroom battles, so it is a real possibility Smith would nominate DiCicco if Starboard were to launch a campaign at Merit.
According to relationship mapping service BoardEx, a sister company of The Deal, Smith was a director on medical device manufacturer Kensey Nash Corp. in 2007 and 2008 while DiCicco was CFO there. Kensey Nash was a manufacturer of medical device parts, like Merit, until it was acquired by Royal DSM NV in 2012. DiCicco’s background suggests she has a lot of expertise in the medical device sector.
Two Merit directors may be overtenured and could be good targets for Starboard if it were to launch a director fight. According to BoardEx, Kent Stanger, a former CFO, and Franklin Miller have served on the board for 33 and 15 years, respectively.
Shares of South Jordan, Utah-based Merit shot up about 8% to $37.36 on the news of Starboard’s stake, which suggests the market expects the firm to escalate its efforts at the company.
On Oct. 30, Merit Medical reported missing earnings estimates for the third quarter of 2019, ended Sept. 30, with adjusted earnings per share of 28 cents, significantly below FactSet Research Systems Inc.’s consensus analyst estimate of 45 cents a share. Its shares dropped precipitously on the news. Soon after that, Starboard began accumulating stock between Nov .13 and Dec. 16 at prices ranging from $25.87 to $34.47 a share.
One analyst said Merit has underperformed some peers recently, including Teleflex Inc. (TFX), which also manufactures medical devices. He added that private equity or other healthcare technology companies could be interested in acquiring Merit. He noted that in 2017, Becton, Dickinson & Co. (BDX) acquired medical technology company C.R. Bard Inc.
Merit’s next earnings report is expected in the last week of February. In a statement, Merit said it values “constructive input from our shareholders toward the shared goal of enhancing value.” The company added that it has not met with Starboard, but looks forward to engaging with them. “as we do regularly with our shareholders, to better understand their views.”
Olshan Frome Wolosky LLP partners Steve Wolosky and Andrew Freedman advised Starboard Value.