Pirates
of Ramius Unplugged
By Walter
Eisner
The
Pirates of Ramius have now boarded the good ship Orthofix and the final battle
for control of the vessel is scheduled to take place April 7 in the Dutch
Antilles.
The
boarders should now be considered privateers since receiving permission from 55%
of Orthofix shareholders to board the ship and offer their slate of candidates
to replace four of Orthofix’s current Board Members.
Ramius
charges that the Orthofix Board made a big mistake when it paid $333 million for
Blackstone Medical in 2006. In a nutshell, Ramius thinks the Orthofix Board
ignored critical risk factors and failed to put in place a viable operating
plan.
Shareholder
Value
Dumping
Blackstone will create more value for shareholders, say the boarders, as they
have their sights set on a stock price of $25 per share. Orthofix shares were
trading at around $10 when the pirates began their assault in November. The
stock price quickly moved to $16 and is now at around $19 after the company
reported positive quarterly financials on February 12.
Orthofix
has taken numerous measures since sighting the privateers on the horizon, one of
which was hiring a PR firm that specializes in political contests to defend the
ship. Other measures included accelerating the launch date of Trinity, its adult
stem cell product; releasing two new spine products; and reducing the company’s
debt obligations.
Ramius
Partner Jeff Smith, who recently left a successful stint on the Board of Kensey
Nash, and Ramius Managing Director Peter Feld, one of the proposed candidates
for the Orthofix Board, spoke with Orthopedics This Week recently to discuss
their plans for seizing control of Orthofix.
The End
Game
OTW: What
is your end game? At what point here do you say you have achieved
success?
Smith:
From our standpoint, we are a shareholder so we measure success in terms of
value creation. Success for us has never been measured in wins or losses, in
contests, or gaining representation on the Board. It is really more about doing
what is right and doing what is in the best interest of all the shareholders to
unlock value. Our bias has always been to do that in a way that maximizes
cashflows of businesses and unlocks the real value of the
company. We would define that as the way we win.
OTW: You
mentioned a $25 share price in your letter to shareholders. Is that one measure
of success?
Feld:
Yes. Given where multiples are and that companies are trading at depressed
valuations, we believe that if you were to take the steps that we have outlined
to improve value—even in the current market environment—the stock could be worth
that much. But clearly, longer term, there is more value to be had at this
company, based on continuing performance of the core businesses as well as a
more normalized environment for valuations.
OTW: You
bought your shares after Orthofix acquired Blackstone Medical. If you thought
that acquisition was a bad idea, why did you buy the shares?
Smith: We
bought the shares because we thought that there would be a lot of value created
if they were able to sell off or improve Blackstone…We did not buy the shares
right after they bought Blackstone. We bought the shares when the stock was
under $15 a share, so we thought that the opportunity to fix the problem far
outweighed the fact that there was a mistake made. That does not mean that there
was not a mistake. We do not think the Board did enough work, or that
the analysis surrounding the decision to buy Blackstone was as sound as it
should have been. We certainly did not buy the stock because we liked
Blackstone.
Board
Missteps
Feld: To
be clear on that point, the company [Orthofix] bought Blackstone in August of
2006 for $333 million. Since that time, in our opinion, there have been several
missteps in terms of execution and strategic decision-making which have led to
Blackstone going from a profitable business when they acquired it to a business
that is currently losing a substantial amount of money. But in addition to
probably overpaying for the company, they have also made several missteps since
they bought Blackstone. The opportunity we see in terms of creating value for
Orthofix shareholders is in righting some of those poor decisions that have been
made over time which could include potentially selling Blackstone or taking more
drastic measures to improve it otherwise.
Smith: It
is hard to generalize, but we do look for companies that we believe are
undervalued and where, if specific changes were made, value can be unlocked for
the benefit of the shareholders. In those situations, we look to buy a stake in
the company and work with management to help them focus on strategy, aspects of
their business and their balance sheet to unlock value. We have done that in
several situations and we do look for those opportunities. Usually, the
opportunities work out in a very friendly, constructive manner with companies,
and other times it takes a little bit more effort in order for management and
the Board to understand that the status quo or the current momentum is not the
best choice and is not in the best interest of the shareholders. Sometimes,
change is beneficial for shareholders.
One
situation that we were involved in recently that delivered significant value to
shareholders was a company in the medical device space called Datascope. Shortly
after securing change at the Board level, Datascope entered into a transaction
to sell the Patient Monitoring division for $240 million to Mindray Medical. The
Patient Monitoring business was break even at the time and was significantly
underperforming expectations. Once the transaction to sell the Patient
Monitoring division closed, the company was approached by several parties
interested in acquiring the remainder of Datascope. The Company subsequently
entered into a transaction to be sold to a Swedish healthcare company, Getinge
AB. Significant value was created for all shareholders.
“Not Just
Looking for a Fast Buck”
OTW: What
is the average length of time you stay active in a company and where are you on
that timeline with Orthofix?
Smith: I
do not know if we calculate average length of time. Sometimes we hold
investments for a short period of time, and sometimes we hold them for multiple
years. So it is hard to say. We do not really measure our investment horizon so
much by time. We measure it by accomplishment, so from that standpoint, we are
at the very beginning of our investment at Orthofix because we believe there is
a lot that can be done that will unlock a fair amount of value for the benefit
of the shareholders.
[Later
during the interview, Smith said the following]:
We are
not just looking to make a quick buck. We are cognizant of the time value of
money and we are cognizant of the risk of long-term business plans, so if your
plan, whatever it is, is going to be back-end loaded, you need to make sure that
it is discounted appropriately to justify the risk. It does not mean it does not
make sense to be looking at long-term opportunities. We look at long-term
opportunities all the time and we make long-term decisions all the time. It is
just a matter of evaluating them with a fresh perspective, an open mind, and the
ability to objectively weigh the risk and reward.
Sparing
the Captain
OTW: You
recently dropped Orthofix CEO Alan Milinazzo from the list of candidates you
wanted to replace. Why?
Feld: As
a matter of good corporate governance, it makes sense for the CEO of a company
to be on the Board. Alan is currently the acting CEO of the company, and
therefore, it makes sense for him to be a member of the Board of Directors. It
is then the responsibility of the Board to determine whether management is
effective and whether a change needs to be made.
OTW: Have
you had conversations with other shareholders about whether or not Milinazzo
should be replaced on the Board?
Smith: We
have had conversations with shareholders and there are certainly some that would
like to see a change there and some that would not.
OTW: Is
there a strategy that you are pursuing to win the votes of 51% of
shareholders?
Feld: Our
strategy is to continue to do what is best for shareholders. Frankly, as part of
the requirements to call the meeting, we only needed to get 10% of the
shareholders to support calling a special meeting, and we have received 55%, so
clearly we are happy with the support we have received from shareholders. Again,
we think that we are working for the benefit of all shareholders to create
value, and that is what we are focused on.
OTW: Are
you lobbying other shareholders?
Feld: We
have published several letters and those letters outline our views related to
the company. We have also hired a proxy solicitor, which is a fairly normal
course during one of these campaigns. Once we have a definitive proxy statement
filed in relation to the special meeting we will certainly be communicating
directly with shareholders to make our case.
Smith:
There are specific proxy solicitation requirements in terms of actually
soliciting votes before your proxy materials are cleared by the
SEC.
Personal
Attacks
OTW:
Peter, the current Chairman of the Orthofix Board says that you are too young,
not experienced enough and out of your league here. What’s your response to
that?
Feld: Our
mentality here at Ramius is to always focus on the core issues. We do not
individually disparage managers or Board Members. We really focus in on the
issues. From my perspective, I would prefer to focus on the real issues facing
the company and how to remedy those issues in order to create value for
shareholders. I think that their response is mostly noise as it relates to
me.
Smith: We
are trying to figure out how to put the best possible Board together for the
benefit of all shareholders, and it is not terribly constructive for the company
to be focused on a nominee’s age as opposed to value that can be contributed.
That is an example of their narrow thinking. What they should be doing instead
is trying to figure out how to come up with the best possible Board for the
benefit of all shareholders. Clearly, this Board has misstepped in a number of
places, which we have illustrated. When that happens, the shareholders deserve
to make sure they have proper representation, which means not only industry
experts but also experts in finance and good corporate governance.
OTW:
There were also questions raised by the Chairman about allegations regarding
another of your nominees, Steven Lee. He expressed concern that when Lee was at
PolyMedica, there were allegations of Medicare fraud, which were then settled
and Lee abruptly retired.
Smith:
That is old news. There was nothing found out as it relates to that. The company
was sold for a lot of money, and shareholders did very well. Again, I think,
instead of focusing on what is best for shareholders and how to properly run the
business, they are focusing on personal attacks. We have not gone out and
attacked anybody personally, nor do we plan to, as Peter mentioned before.
Instead, we want to focus on the merits—what is in the best interest of the
company, what is in the best interest of the shareholders—and we believe that
our Board Members are terrifically additive to the company and will create good,
instructive, stimulating dialogue inside the
boardroom
so the company can operate better. We hope that when there are tough decisions
in the future, the sins of the past are not repeated.
Dumping
Blackstone
OTW: You
want Orthofix to sell Blackstone for the best possible price. Do you think that
your public criticism of Blackstone diminishes the value of Blackstone in terms
of what price it can bring in the marketplace?
Feld:
That is a judgment I cannot make for you. To be clear, there have been missteps
at Blackstone. They paid a very large sum of money for the company. We believe
that there may have been flaws in the due diligence that was done, and since the
closing of the acquisition, there have been several issues that have come to
light—both legal and operational. But we approach the situation with an open
mind. Selling Blackstone is one option and one option that would certainly
preserve value for shareholders and, in our opinion, potentially lower the risk
profile of the company, but it is one option that our Director
nominees—including myself—would certainly be willing to consider as well as any
other options that present an opportunity to improve value.
We are
making a judgment and an assessment based on publicly available information that
we currently have. If elected to the Board, the other newly elected directors
and I will obviously use all of the resources available to us to make a
determination about what we believe to be the best possible outcome for
shareholders. We would approach that with an open mind and a willingness to
listen to other alternatives.
Even if
you were to sell Blackstone for a minimal price, we believe that substantial
value would be created for shareholders and the company would be in a much
lower-risk position in terms of its capital structure. There may be other
choices and we approach that with an open mind and we can look at it with a
fresh perspective. But as we have mentioned, in addition to dealing with
Blackstone, there are other opportunities at the company such as dramatically
reducing corporate overhead expenses. These expenses have increased
substantially since the acquisition of Blackstone, and we think that is a large
opportunity.
Losing
Osteocel
OTW:
You’ve said the loss of the Osteocel product could have been avoided if the
Board would have done better due diligence. How would that have prevented the
setback of Osteocel?
Feld: I
would not characterize it exactly as you did. The point we were making is that
clearly at the time of the acquisition of Blackstone, a meaningful portion of
the $333 million paid for Blackstone was associated with the Trinity product.
That was a high-growth new biologic product that Orthofix looked at as a
high-growth big opportunity for them.
That
product was under contract from Osteocel for exclusive distribution rights
through the first half of 2009, after which they [Blackstone] had no right to
the product and no agreement to distribute it.
They
[Orthofix] associated a large amount of value with that product and instead of
either negotiating an extension or something like that to the distribution
agreement prior to closing the acquisition, or just renegotiating that contract
or even structuring the purchase of Blackstone as more of an earnout based on
their ability to get a new contract for the Trinity product, they just paid a
big price and here we are two years later—losing that product. Hindsight is
20/20, but we believe that [the acquisition] probably could have been structured
in a more beneficial way for shareholders.
A Fresh
Perspective
OTW: Any
final comments for our readers?
Smith: I
think that the most important thing is that our nominees really are going on the
Board to work for the best interest of all shareholders. We believe that the
sale of Blackstone is a smart thing to do. We believe that it will create value.
If elected, our nominees would go on the Board with an open mind to see if,
using that as a baseline, there are other things that might be better, but they
get the ability to go onto the Board with an open mind to be able to evaluate
that alternative as well as all other alternatives without the burden of prior
mistakes and trying to justify or rationalize prior mistakes. They get to be
able to go on with a fresh perspective.
That is
an important thing for any Board, especially one that has made some mistakes. To
be able to have some people come on with a fresh perspective, who are
knowledgeable, intelligent and open-minded enough to be able to look at the
situation unburdened, to be able to come up with what is the best alternative,
in their collective opinion, and in the best interest of all shareholders
without the burden of past mistakes. It is very, very important.
By the
time this battle is over, it’s going to cost the company and shareholders some
money. But since the start of this engagement, shareholders of Orthofix have
seen the value of their holdings in the company explode. Consider:
Cost of
battle for Orthofix: $600,000 – $700,000
Cost of
battle for Ramius: $250,000 +
Increase
of shareholder value since November: $153,000,000
Entertainment
for OTW readers: Priceless
# #
#
CERTAIN
INFORMATION CONCERNING PARTICIPANTS
Ramius
Value and Opportunity Master Fund Ltd (“Value and Opportunity Master Fund”),
together with the other participants named herein, expects has made a definitive
filing today with the Securities and Exchange Commission (“SEC”) of a proxy
statement and accompanying GOLD proxy card to be used to solicit votes for
proposals to elect four director nominees to replace four current members of the
Board of Directors of Orthofix International N.V., a limited liability company
organized under the laws of the Netherlands Antilles (the “Company”), at a
special general meeting of the Company that Value and Opportunity Master Fund,
together with certain other shareholders of the Company, requested that the
Company call pursuant to the Netherlands Antilles Civil Code. The Company has
scheduled the special general meeting to be held on April 7, 2009.
VALUE AND
OPPORTUNITY MASTER FUND ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE
SOLICITATION MATERIALS IN CONNECTION WITH THE SPECIAL GENERAL MEETING BECAUSE
THEY CONTAIN IMPORTANT INFORMATION. SUCH MATERIALS ARE AVAILABLE AT NO CHARGE ON
THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THE
SOLICITATION WILL PROVIDE COPIES OF THE SOLICITATION MATERIALS WITHOUT CHARGE
UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’ PROXY
SOLICITOR, INNISFREE M&A INCORPORATED, AT ITS TOLL-FREE NUMBER: (888)
750-5884.
The
participants in the proxy solicitation are Value and Opportunity Master Fund,
Ramius Enterprise Master Fund Ltd (“Enterprise Master Fund”), Ramius Advisors,
LLC (“Ramius Advisors”), RCG Starboard Advisors, LLC (“RCG Starboard Advisors”),
Ramius LLC (“Ramius”), C4S & Co., L.L.C. (“C4S”), Peter A. Cohen (“Mr.
Cohen”), Morgan B. Stark (“Mr. Stark”), Thomas W. Strauss (“Mr. Strauss”),
Jeffrey M. Solomon (“Mr. Solomon”), Peter A. Feld (“Mr. Feld”), J. Michael Egan
(“Mr. Egan”), Steven J. Lee (“Mr. Lee”) and Charles T. Orsatti (“Mr.
Orsatti”).
As of the
date of this filing, Value and Opportunity Master Fund beneficially owns 818,945
shares of Common Stock of the Company. RCG Starboard Advisors, as the investment
manager of Value and Opportunity Master Fund, is deemed to be the beneficial
owner of the 818,945 shares of Common Stock of the Company owned by Value and
Opportunity Master Fund.
As of the
date of this filing, Enterprise Master Fund beneficially owns 130,035 shares of
Common Stock of the Company. Ramius Advisors, as the investment advisor of
Enterprise Master Fund, is deemed to be the beneficial owner of the 130,035
shares of Common Stock of the Company owned by Enterprise Master
Fund.
Ramius,
as the sole member of each of RCG Starboard Advisors and Ramius Advisors, C4S,
as the managing member of Ramius, and Messrs. Cohen, Stark, Strauss and Solomon,
as the managing members of C4S, are each deemed to be the beneficial owners of
the 818,945 shares of Common Stock of the Company owned by Value and Opportunity
Master Fund and the 130,035 shares of Common Stock of the Company owned by
Enterprise Master Fund. Messrs. Cohen, Stark, Strauss and Solomon share voting
and dispositive power with respect to the shares of Common Stock of the Company
owned by Value and Opportunity Master Fund and Enterprise Master Fund by virtue
of their shared authority to vote and dispose of such shares of Common
Stock.
As of the
date of this filing, none of Messrs. Feld, Egan, Lee or Orsatti directly own any
shares of Common Stock of the Company.
As
members of a “group” for the purposes of Rule 13d-5(b)(1) of the Securities
Exchange Act of 1934, as amended, each of the participants in this solicitation
is deemed to beneficially own the shares of Common Stock of the Company
beneficially owned in the aggregate by the other participants. Each of the
participants in this proxy solicitation disclaims beneficial ownership of such
shares of Common Stock except to the extent of his or its pecuniary interest
therein.