Activist Starboard Value targets medical device company

Starboard Value, a top-tier activist investor firm, amassed a 9% stake in Merit Medical Systems, Inc. (NASDAQ: MMSI), a manufacturer of disposable medical devices, CNBC reported.

Who is Starboard and Merit Medical?

Starboard boasts an impressive track record of pushing companies to change their operations. The firm boasts expertise across multiple market segments ranging from technology, cloud computing, and restaurants.

The activist investor now controls nearly $250 million worth of shares in Merit Medical whose products are used mostly in interventional, diagnostic, and therapeutic medical procedures, according to CNBC.

Background

Starboard and Merit Medical entered into an agreement on May 26 whereby four out of the 10 directors would step down. In return, the activist investor gets to add three of its appointees to the board, effective at the 2020 annual general meeting.

Merit Medical also agreed to appoint a new lead independent director after the meeting and establish a new operating committee. The committee will consist of the three directors appointed by Starboard and the company’s CEO and will be tasked with setting new operating margin goals. Investors can expect specific guidance as part of the company’s third quarter earnings report.

Starboard’s interest

Per CNBC, Starboard likely recognized Merit Medical has a path to improve its business which was plagued by execution issues with an acquired higher-margin product line and soaring expenses. 

The company has shown superior organic revenue growth versus its peers but this failed to flow to the profit line. Also, the 14.6% EBITDA margin is notably short of some of its competitors who boast EBITDA margins in the mid 20’s to low 30’s.

Starboard’s game plan

Merit Medical was founded in 1987 by Fred Lampropoulos who deserves credit for expanding the company to be worth $2.5 billion today. However, his leadership style lacks some discipline and Starboard likely believes it can bring to the table discipline. This scenario is quite common as activist investors recognize founders who created a company out of nothing may no longer be the best person for the job.

Starboard could also push Merit Medical to sell itself, according to CNBC. The medical technology space has been flush with recent deals and Merit Medical certainly has assets that others would love to control.

Recent deals took place at four to five times revenue which represents a premium to Merit Medical as the stock is trading at around 2.5 times revenue.

Meanwhile, Lampropoulos is 70 years old and may not resist an opportunity to retire with a hefty paycheck.