Did JANA Partners use its usual method to get the CEO out at Zimmer Biomet Holdings?

Known in some corporate circles as a Wall Street “bully”, Jana Partners Managing Partner Barry Rosenstein is known in other hedge fund strategy circles as being an activist investor who lives up to his word. Rather than start an “engagement” by blasting corporate management and attacking a board as some activists have done, Rosenstein’s latest strategy iteration is known for being clear on the process and attempting to work extensively behind the scenes before going public. Fireworks have been known to ensue when the corporate managers are publicly challenged. But it is in the relative nuance and constant behavior where a secret to Rosenstein’s success is found, in part on view in an excerpt of the Jana Partners recent letter to investors reviewed by ValueWalk. Rosenstein is clear about his intentions to increase the stock price regardless of corporate responsibility, and sometimes he uses aggressive tactics should cooperation not be forthcoming.

Jana Partners Zimmer Biomet Holdings
Image source: Made with Photoshop

Unlike The Godfather, Jana does not put a dead horse head on Zimmer Biomet Holdings CEO’s pillow

When Jana Partners has an activist stock target, they are upfront and transparent about their intentions, lay out the issues and the options available to corporate management that typically involve a choice between fight or flight.

Rosenstein is respected to a degree based on a specific consistent pattern of behavior. While some of his strategies buying stocks at a discount and forcing management change to improve stock performance have gotten messy – with public threats and subtle intimidation tactics drawing rebuke for “crossing a line” – he also has a reputation known for being clear and living up to a set of stated rules. He approaches corporate management and the board with a specific set of improvement issues and attempts to work behind the scenes for performance improvement. Jana essentially offers them a deal they can’t refuse: either cooperate or the fight could get messy with elite sensibilities on the board of directors and at the corporate level getting challenged – or worse.

In the recent Jana Partners letter to investors, a subtle intimidation process appears on display, but one based, in part, on similar persuasion performance drivers. Jana doesn’t put a bleeding horse head on the bed of a corporate CEO — the firm is more sophisticated but often their tactics can be just as effective.

Zimmer Biomet Holdings board cooperated and no one was publicly humiliated

Bloomberg reported that Jana had acquired a stake in $26 billion medical-equipment firm Zimmer Biomet Holdings. The company later announced the firm’s Chief Executive Officer had stepped down after CEO succession was reported as one of the topics under discussion between Jana and the company’s leadership.

In the investor letter, Jana said the core problem at the company was “poor operational execution” that was leading to a price-earnings share multiple noticeably below industry comparables. “We see a good asset in need of new leadership,” Jana wrote of its general approaching Zimmer Biomet Holdings, then pointing to the CEO leaving the firm in the next sentence.

The full quote is as follows:

Zimmer is a leader in the reconstructive surgery implant market, a growing segment dominated by a few global players. Zimmer has been a consistent share donor for ten years, and share losses have only accelerated since the 2014 acquisition of Biomet, causing ZBH,s multiple to disconnect materially from the overall market and the medical device group. Our research indicates that Zimmer’as share losses are not due to structural factors; rather, the underperformance is the result of poor operational execution. In Zimmer, we see a good asset in need of new leadership. On July 12th, the company announced the resignation of long time CEO David Dvorak and the immediate search for a new leader. We anticipate that a new leader will be able to return Zimmer to market rates of growth in hips and knees, which could drive meaningful expansion to ZBH,s depressed multiple. Meanwhile, Zimmer.s strong free cash flow generation should enable rapid deleveraging, and there are opportunities for portfolio improvements as well. Divesting the non-strategic dental business, for example, would eliminate a drag on organic growth while accelerating debt paydown.

In this case, corporate management appears to have succumbed to Jana’s powerful charms. Unlike other activist fund managers, who sometimes target board members using the “go public” tactic without following a defined process or giving a warning first, Jana is operating by a consistent code of conduct that is respected among certain hedge fund managers but is despised in some corporate circles.

Jana is also a value shop, likes Pandora

In other activist involvement, Jana explained its filing of a 13D regarding the EQT Corporation acquisition of Rice Energy Inc. Rosenstein gave some polite advice to the firm: “EQT shareholders will be more richly rewarded through the separation of the midstream and upstream business rather than by the acquisition of Rice.” Instead of building a corporate empire, break the company up and unleash shareholder value, the Jana letter implored, a point that is consistent across much of Rosenstein’s interactions. That looks like: Here is how to improve the company. Don’t make me get aggressive just to help you improve performance, please. In other words, the apparent classic Jana approachment tactic.

The firm isn’t just an activist, however. The letter noted value in Pandora, noting that a recent buy on a drawdown strategy was in place in early June, and it also likes Sunoco on financial engineering issues and the recent Seven-Eleven acquisition.

When reached, a Jana Partners spokesperson declined to comment.