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As you are well aware, for several months Voce Capital Management LLC (“Voce”) has implored Air Methods to take action to address the destruction of shareholder value wrought by the Company’s increasingly untenable ownership structure. Out of respect for the Board, and in an effort to allow it to reach on its own what most rational observers believe is a fairly inescapable conclusion, we’ve patiently employed a variety of channels to communicate our views and gently attempt to prod the Board into action. These have included a trip to Denver in June to meet with management; a private letter to the Board, dated June 30, 2015 (the “First Letter”); another visit to Denver on August 3 to meet with the Board; a number of follow-up calls in August which confirmed the Board did not intend to pursue our recommendations; another detailed letter, this time public, dated September 16 (the “Second Letter”); more fruitless conversations; and yet another private letter to the Board, dated October 2, 2015 (the “Third Letter”).
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More than a month has passed since the Second Letter and we have been engaged with the Board in this futile colloquy for the better part of six months. While we have appreciated the open lines of communication, we are disappointed by the Board’s inertia and unwillingness to act in the best interests of shareholders. Here is what we have learned:
Our views command substantial support. As a reminder, Voce is the beneficial owner of approximately two million shares (4.9%) of Air Methods, making us the Company’s sixth-largest shareholder. Following the Second Letter, we have spoken with many of the Company’s other top shareholders, most of whom (like us) have been owners for multi-year periods. We haven’t met a single shareholder that didn’t share our frustrations nor concur that an evaluation of all options, including a sale of the Company, represents a better path forward for shareholders than anything the Board or management has articulated to date. We know that many of our fellow shareholders have communicated these sentiments directly to the Company as well but have encountered the same lethargy that we’ve observed. In addition, most of the research analysts who cover Air Methods (many of whom also have very long histories following the Company) have published notes corroborating our analysis.1
The Board’s lack of genuine response is insulting to shareholders. After spending the entire summer trying to spur the Board into action, we released the Second Letter publicly. Our hope was that it would motivate the Board to act or, at a minimum, invite it to specifically respond to our ideas and, to the extent it had a superior plan to create shareholder value, reveal it. Yet the Board has refused to even publicly acknowledge our dialogue. Its only responses have been timorous, terse and trite. For example, in response to our Second Letter, which ran nine single-spaced pages (including seven footnotes), we received a brief missive that would have fit on a postcard with room to spare: “Thank you for your letter of September 16. We always appreciate input from our shareholders and you can be sure that our Board of Directors will consider the points you have raised.” Really?2
The Board fails to comprehend that urgent action is required. The Board’s platitudinous assertions about its devotion to shareholder interests are, without accompanying action, meaningless. We have been mindful of allowing the Board the time and space to engage the financial advisor(s) of its choice, but more than ample opportunity for this has already passed. In the meantime, the Company’s stock continues to underperform and it remains one of the market’s most heavily shorted names.3 We move closer each day to the demise of the current benevolent interest rate regime which may significantly limit the attractiveness of, or foreclose altogether, a potential sale of the Company.
The costs of delay can also be seen in the Board’s apparent failure to capitalize on a significant opportunity to repurchase shares at compelling valuations. Shortly after our meeting with the Board, it announced a $200 million share repurchase plan on August 6, with the stock price at $39.57. Unless we’re mistaken, we believe the Company has bought back few, if any, shares under this plan, despite the fact that more than 17,000,000 shares (approximately 49% of the float) have turned over since that time, almost all of them at prices below the announcement date and in many instances at multi-year lows. We believe this economically irrational behavior is due to a frantic effort to produce an M&A transaction in hopes of somehow rebutting our call for a sale of the Company. We have never opposed (and have in fact supported) accretive acquisitions by Air Methods, although we don’t see how they will alter the Company’s larger fundamental issues that we have painstakingly laid out and which the Board has yet to address. But if we’re correct about the share non-repurchase – and we’ll soon find out when the Company reports 3Q15 earnings – then it will provide yet another demonstration of the Board’s inability to properly account for the costs it’s imposing upon shareholders through its single-minded fixation on the Company remaining independent.
The Board’s continuing refusal to perform its responsibilities implicates more than simply its competence. One must ask why the Board is so resistant to even entertain a potential sale of the Company. Of course, such an outcome would eliminate its expensive “public company overhead,” including its ten-member Board. Presumably the directors really enjoy these seats – four of them have held them for more than twenty years each. And it’s easy to see why: The average director received $314,360 in 2014 Board compensation; the Chairman raked in a cool $425,740. These are extravagant payments, particularly for such a relatively small company and especially when evaluated in the context of their recipients: With two exceptions, all of the directors are either retired and/or self-employed; with the same two exceptions, none sits on any other public Boards; three are over 70 years old (one of those is over 80). As we detailed in the Second Letter, the independent directors have also been very heavy sellers of Company stock. Shareholders are entitled to question whether directors’ personal needs are impairing their ability to act in shareholders’ best interests.
The Board desperately needs professional advice. We have repeatedly urged Air Methods to retain a credible financial advisor to assist in evaluating all options to enhance shareholder value. Its failure to do so is particularly inexcusable in light of its simplistic, and often errant, grasp of key concepts. These include its misunderstanding of how equity investors balance risk and reward in a small capitalization stock such as Air Methods; its inability to distinguish between real and nominal valuations; and its mispricing of risk. The Board also labors under some fairly significant M&A misunderstandings such as its devotion to the myth that premia in private equity transactions are capped at 25%; that one should only initiate a sales process when trading at a 52-week high; and other such flumadiddle.
Incredibly, having refused to address a single point raised in any of our meetings or detailed letters, the Board has floated a request that we deliver our financial models to the Company for inspection. That’s exactly why the Board needs an advisor – so it can obtain professional advice and analysis, instead of relying on our word or its own intuition. Rather than dabbling with such gamesmanship, the Board should get on with the work at hand.4
The Board should expect shareholders to hold it accountable. The Board has surrounded itself with an armamentarium of entrenchment devices designed to limit shareholders’ influence.5 Yet three of its ten directors still must stand for reelection in 2016. These include the Chairman, Mr. Kikumoto, who has been a director for 11 years; Mr. Belsey, the Company’s former CEO, its Chairman until October 2011 and a member of the Board since 1992; and Mr. McNair, a director since 1996. They and their colleagues should remember that a Company sale is neither an admission of failure nor a defeat. Many great companies are built, achieve success and reward their owners along the way until reaching the point where value can best be maximized through a change of control. The approximately 50% increase in shareholder value that our analysis suggests is achievable would be such an outcome and should be sought rather than dreaded. What better way for a very long-standing Board, such as this one, to go out on a high-note and in grand style?
On the other hand, some companies (and directors) overstay their welcome, and shareholders suffer as the asset begins to decline in value. A strong Board recognizes this turning point and embraces the opportunity that it represents, while a weak one fails to see it or, even worse, stubbornly attempts to resist it. Shareholders are about to discover which type of Board they have elected at Air Methods and will decide whether it properly represents their best interests going forward.