Shares in FTSE-100 medical equipment firm Smith & Nephew (SN.) leapt this morning on news Swedish activist investor Cevian Capital had taken a 5% stake in the business.
In trading this morning Smith & Nephew shares jumped 7.2%, and are up 7.6% over the past five trading days. However, its share price performance in the past five years has been decidedly lacklustre. Since 5 July 2019 shares are down 38.5%.
Commentators say the company will now have its feet held to the fire by the development, which will likely result in more ambitious targets being set for the business.
"Cevian has previously taken positions in UBS [UBSG], Vodafone [VOD] and Aviva [AV.] in an attempt to force change and the case for doing so at Smith & Nephew is presented by a near-40% decline in the share price over the last five years," says AJ Bell investment director Russ Mould in a note.
"The company was severely affected by the pandemic as elective procedures like hip and knee replacements were cancelled, reducing demand for its orthopaedic products. Lockdown also hit the company's supply chain, as it did for many businesses.
"Cevian is likely to hold management's feet to the fire and may look for more ambitious targets than set out under the existing improvement plan. It could also push for a rationalisation of the company's portfolio, which encompasses sports medicine and wound care alongside orthopaedics."
In a statement, Smith & Nephew said it had "an open dialogue with our shareholders and will continue to engage with Cevian, as we do with all of our shareholders."
Key Morningstar Metrics for Smith & Nephew Stock
• Fair Value Estimate: £15.12
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
Why is Smith & Nephew Being Targeted?
Smith & Nephew has faced significant difficulties in recent years, suffering hits to its supply chain as well as reduced sales in China due to ongoing problems with its volume-based procurement programme.
The company has also faced a high turnover in the c-suite, appointing three chief executives over the last five years.
Debbie Wang, senior equity analyst at Morningstar, recently wrote that Smith & Nephew’s turnaround plan under its current CEO Deepak Nath is showing signs of progress, and especially outside of the US, however.
"Though improvement has been taking hold, the pace remains on track with our expectations for the full year, and we are therefore, leaving our Fair Value Estimate unchanged," she wrote.
Yet the firm's longstanding problems in the US remain unchanged.
"Existing issues with low inventory of certain items and the availability and turnover of instrumentation sets in the US were already problematic, but any improvement has been hampered by turnover in the commercial organisation in 2023," she said.
What is an Activist Investor?
Activist investors buy stakes in publicly-traded companies to deliberately force a change of strategy or promote a specific business project. Usually a specialised hedge fund, the investor aims to change how a company is managed.
The goals of an activist investor can range from advising management on the direction of the business or in some cases taking a more aggressive stance on board change or even an outright sale.
Nelson Peltz, the US billionaire, is a famous example of an activist investor.
Peltz helped found New York alternative investment manager Trian Partners in 2005, and he recently took a stake in London-listed pest control firm Rentokil (RTO), stating he would engage with the firm's leadership on "ideas and initiatives to improve shareholder value."
When the announcement dropped on June 12, Rentokil's share price jumped 11.6% to £4.62.
This year he also got into a proxy battle with Disney (DIS) that originally aimed to oust two board members: Maria Elena Lagomasino and Michael Froman. However, Peltz ended up losing the battle, which resulted in the sale of his stake in the entertainment giant.
