Masimo campaigner Politan presents ‘last chance’ to shareholders to force change at medical technology company

Despite voting for the change at last year’s annual meeting, shareholders of the medical device maker The fields have seen their governance issues remain largely unresolved, according to activist investor Politan Capital Management.

With just a month until the 2024 annual meeting, Politan, who has already won two board seats, is looking to go further. Led by Quentin Koffey, Politan named two additional directors to the company’s board, saying that without their election, management would continue to operate without oversight. Masimo founder and CEO Joe Kiani said he wouldn’t return if shareholders rejected him.

“This is the last chance for shareholders to achieve meaningful change,” Politan wrote in a letter to Masimo shareholders Wednesday, laying out his case to investors ahead of the meeting. CMBC obtained a copy of the letter and an attached presentation.

Masimo, best known for his success in patent litigation on the Apple Watch, was initially targeted by Politan last year due to what the activist saw as poor management, a lack of board independence and a misguided acquisition that alienated the company from its core business.

Influenced by Politan’s arguments, investors voted last year to elect Koffey and Michelle Brennan to the board.

But the governance improvements fall short of what shareholders deserve, Koffey wrote in the letter, emphasizing that Masimo’s board “does not review, approve or see any budget”.

“This leads Mr. Kiani to spend whatever he wants however he wants,” Koffey wrote.

For this year’s meeting, Politan named Darlene Solomon, former chief technology officer at Agilentand Bill Jellison, former CFO of Stryker.

Masimo stock has continued to decline, falling 18% since last year’s meeting, while the S&P 500 has gained 26% during that time. Politan says it has not been possible to make significant changes to how the company is run, adding that Masimo’s board still has no control over CEO Kiani or management of the company.

The activist claims that with good governance, the company could see a $10 billion increase in shareholder value. Its current market capitalization is $7 billion.

“Fundamentally, the goal of this upcoming vote is simple: to address Masimo’s prolonged and deliberate refusal to allow independent oversight,” Koffey wrote in the latest letter.

Last year’s proxy fight was hard-fought and costly. Masimo took aggressive steps to push back against Politan, introducing statutes to force the company to reveal its shareholder list. Many of those efforts were rejected by a Delaware judge. Kiani threatened to resign if Koffey was elected.

A Masimo representative did not immediately respond to a request for comment.

Kiani remains CEO and many themes persist. But in this year’s proxy fight, Kiani occupies one of the director positions Politan is targeting.

“The shareholders have spoken,” Politan said in his presentation. “But nothing has changed.”

A key part of Politan’s pitch to shareholders last year revolved around Masimo’s $1 billion acquisition of Sound United, owner of high-end audio brands such as Bowers & Wilkins and Denon. Masimo shares plunged 37% after the purchase was announced, and Politan highlighted the 2022 deal as an example of what happens in a bad governance structure.

While Kiani continued to assert that the tie-up would help Masimo bring its medical technology into homes, the company said in March that it would heed investors’ concerns and spin off the consumer brands.

But the question is hardly resolved. Politan said in his Wednesday letter that Kiani disbanded the spinoff’s special committee, headed by Koffey, after “rejecting or modifying numerous” requests from the CEO. For the new company, Kiani sought licenses to Masimo’s valuable intellectual property, the Masimo name, its headquarters and its aircraft, as well as a $150 million cash infusion, according to company filings. activist and by society.

Politan argued that the proposed deal would result in the loss of Sound United and crucial intellectual property essential to Masimo’s shareholder value.

“This is a transfer of valuable intellectual property licenses, trade secrets and trademarks that could permanently harm Masimo’s valuation and create a future competitor while personally benefiting Mr. Kiani,” wrote Koffey.

Politan also highlighted what he called Mr. Kiani’s “enormous compensation” and “lavish” spending, pointing to vacations to the Caribbean and Europe aboard Masimo’s corporate jet and hundreds of millions of dollars in action pledges.

Kiani told CNBC earlier this year that a third party was interested in a joint venture, but he did not provide details. Koffey said he and Masimo’s board were only informed of the potential partner’s name after an agreement in principle was signed. Shareholders have still not been informed.

“Politan wants a separation done right,” Koffey wrote in Wednesday’s letter. “We have been calling for a strategic review of the Sound United business and consumer healthcare spending for over 18 months.”

Politan also noted in the letter that investors have opposed the company’s pay practices and directors’ choices for more than a decade.

Masimo has ranked in the bottom 0.1% of say-on-pay votes among Russell 3000 companies for as long as that metric has existed, Politan noted.

Kiani estimates he would be entitled to a change of control fee of more than $400 million if he loses his seat on the board or if the company completes the split in the manner he wants, according to the documents regulatory.

Politan believes that Kiani’s payment is unenforceable under Delaware law and would not be triggered by Kiani’s ouster from the board, given that the activist offered to reappoint Kiani to an expanded board.

Politan says his campaign must succeed because management’s intransigence will make it difficult for another shareholder to launch a similar action in the future.

“For more than two years, Politan overcame unprecedented obstacles thrown at him by the Masimo board,” the activist said. “We doubt any shareholder will attempt to do this again.”

WATCH: Masimo CEO Kiani says healthcare investors don’t understand the consumer side of business