A sign outside the Smith & Nephew factory in Austin, Texas.
SIPPL kicks US | AP
Company: Smith & Nephew (SN.-GB)
Business: smith and nephew It is a British investment medical technology company operating globally. The company develops, manufactures, markets and sells medical devices and services. Its business segments include orthopedics, sports medicine, otolaryngology, and advanced wound management. Its Orthopedics segment includes a range of hip and knee implants to replace damaged or worn joints, robotic-assisted and digital technologies, and trauma products to stabilize severe fractures and correct hard tissue deformities. Its Sports Medicine and Otolaryngology businesses provide advanced products and instruments for repairing or removing soft tissue. Its advanced wound management portfolio offers a comprehensive suite of products to address a broad range of complex clinical needs.
Stock market capitalization: approximately £9.6 billion (£11 per share). The stock also trades in the U.S. American depositary receipts Under the ticker symbol “neural network”.
Activist: Cevian Capital
Ownership percentage: 5.11%
average cost: 9.68 pounds
Activists commented: Founded in 2002, Cevian Capital is an international investment firm that acquires significant stakes in European listed companies whose long-term value can be enhanced through active ownership. Cevian Capital is a long-term, de facto owner of European public companies. Often referred to as “Constructive Activist Investors”, it is the largest and most experienced professional activist investor in Europe. Cevian’s strategy is to help its companies become better and more competitive over the long term and earn returns by increasing the company’s actual long-term value. The company’s work is often supported by other owners and stakeholders.
What happened
Severian Obtained 5.11% equity The company joined because it believed the business run by Smith & Nephew was fundamentally attractive. Investors believe that improving the operating performance of the company’s business could lead to significant potential upside.
Behind-the-scenes
Smith & Nephew is a global leader in medical technology. The company develops and markets medical devices and services and maintains global market dominance in each of three areas: Orthopedics, Sports Medicine and Otolaryngology, and Advanced Wound Management. Smith & Nephew is known for the quality of its products and its brand awareness is very high. Furthermore, the company operates in a fundamentally growing and consolidated market with good competitive dynamics. Generally speaking, industry leaders have very predictable customer behavior and stable market share. In 2023, the company generated $5.55 billion in revenue, with 40% coming from Ortho, 31% from Sports Med and 29% from Wound. However, the profitability picture is completely different. After allocating overhead, Ortho’s operating margin is just 11%, while Sports and Wound’s operating margin is double that, at 22%.
Despite its leading market position and favorable industry dynamics, Smith & Nephew has not created shareholder value for years – down 44% since January 1, 2020 and down 44% since January 1, 2021, the post-COVID-19 price 33%. That’s not surprising, and the reason seems obvious: the operating margins of its largest business, Ortho. In 2019, Ortho’s operating margin was 23%, which fell to 13% in 2020. This is due to self-inflicted issues related to supply chain management, logistics and manufacturing leading to back orders and implants or required tools not arriving at the right place at the right time. This problem is somewhat unique to Ortho because it is a much more complex business than Wound and Sport, requiring not only timely delivery of the various sizes of implants, components and equipment required for each surgery, but also the need to communicate with the surgery Related specific tools. Another major reason for the company’s missteps is the large number of management changes Smith & Nephew has had over the past five years.
Management has now released a 12-point plan focused on fixing Ortho to regain momentum and win market share. While this is a step in the right direction and this management team may be able to successfully implement this plan, with continued management turnover, that won’t happen. It’s impossible to implement a long-term operating plan when there’s a new CEO every few years. This company clearly needs an activist, but the good news is that Cevian is the perfect activist for this type of company. The two things Smith & Nephew needs most are long-term thinking and operational improvements. Cevian is a long-term activist — the company’s average holding period is four to five years, but it typically holds for eight to 10 years — with a focus on operating performance. The company has a long history of helping companies improve their operations as active shareholders or board members. There’s no reason the company can’t improve its Ortho division’s operating margins back to at least pre-pandemic levels, and possibly higher, closer to peers like Stryker and Zimmer Biomet.
We expect Cevian will seek to assist this effort at the board level, as they hold board seats in most activist positions. Cevian professionals currently serve on the boards of 10 portfolio companies in six different countries. Given the company’s experience and the fact that it is the company’s second-largest shareholder, we expect Cevian will be able to secure a board seat as it does in most events – either amicably or by invitation.
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 activist 13D portfolios.
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