Activist Starboard Value targets a medical device company.

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The activist investor Starboard Value acquired a 9% stake in Merit Medical.
Merit Medical is a manufacturer of disposable medical devices.
Starboad was given some access to the board and was able to push for a sale of the company.

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

Who are Starboard and Merit Medical?

Starboard has an impressive track record of driving companies to change the way they do business. The company has expertise in various market segments including technology, cloud computing and restaurants.

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

Background

Starboard and Merit Medical entered into an agreement on May 26 under which four of the ten directors would resign. In return, the activist investor may add three of its appointed members to the Board of Directors effective at the 2020 Annual General Meeting.

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

Interest of Starboard

According to CNBC, Starboard probably recognized that Merit Medical had embarked on a path to improve its business, which was plagued by execution issues with an acquired product line with higher margins and exploding expenses.

The company has demonstrated superior organic revenue growth compared to its competitors, but this has not translated into profitability. Its EBITDA margin of 14.6% is also well below that of some of its competitors, who have EBITDA margins in the mid 1920s to mid 1930s.

The Starboard game plan

Merit Medical was founded in 1987 by Fred Lampropoulos, who is responsible for the company’s expansion to today’s $2.5 billion. However, his management style lacks discipline, and Starboard probably believes he can bring discipline to the table. This scenario is quite common as activist investors recognize that founders who started a company from scratch may no longer be the best person for the job.

According to CNBC, Starboard could also push Merit Medical to sell itself. The medical technology space has been flooded with deals lately, and Merit Medical certainly has assets that others would like to control.

Recent deals have been closed at four to five times the turnover, which is a premium for Merit Medical as the stock is trading at about 2.5 times the turnover.

Lampropoulos is now 70 years old and will not be able to resist the opportunity to retire with a hefty paycheck.

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