Medtronic makes two key additions to its board. How activist Elliott can build shareholder value

Company: Medtronic PLC (MDT)

Business: Medtronic PLC is an Ireland-based company, which provides health-care technology solutions. The company’s products category includes Advanced Surgical Technology; Cardiac Rhythm; Cardiovascular; Digestive & Gastrointestinal; Ear, Nose & Throat; General Surgery; Gynecological; Neurological; Oral & Maxillofacial; Patient Monitoring; Renal Care; Respiratory; Spinal & Orthopedic; Surgical Navigation & Imaging; Urological; Product Manuals; Product Ordering & Inquiries; and Product Performance & Advisories. Its products include Cardiac Implantable Electronic Device (CIED) Stabilization, Aortic Stent Graft Products, CareLink Personal Therapy Management Software, CareLink Pro Therapy Management Software. Its services and solutions include Ambulatory Surgery Center Resources, Care Management Services, Digital Connectivity Information Technology (IT) Support, Equipment Services and Support, Innovation Lab, Medtronic Healthcare Consulting, and Office-Based Sinus Surgery.

Stock Market Value: $118.78B ($92.71 per share)

Activist: Elliott Investment Management

Ownership: n/a

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor. The firm’s team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, the firm also hires specialty and general management consultants, expert cost analysts and industry specialists. Elliott often watches companies for many years before investing and has an extensive stable of impressive board candidates. The firm has historically focused on strategic activism in the technology sector and has been very successful with that strategy. However, over the past several years its activism group has grown, and Elliott has been doing a lot more governance-oriented activism and creating value from a board level at a much larger breadth of companies.

What’s happening

On Aug. 19, Medtronic PLC announced the appointment of John Groetelaars (former interim CEO of Dentsply Sirona and former president and CEO of Hillrom) and Bill Jellison (former vice president, CFO of Stryker) to the board following engagement with Elliott. Further, the board announced the formation of the Growth Committee and the Operating Committee. Jellison will serve on both, while Groetelaars will join the Growth committee.

Behind the scenes

Medtronic is the largest medtech company in the world by revenue, with a history of medtech innovation and market leadership dating back to the 1940s. While its cardiology segment remains its legacy core business (37% of revenue), Medtronic is now a diversified operator, with its other segments including Neuroscience (29%), Medical Surgical (25% and largely built from their acquisition of Covidien, which closed in 2015) and Other (9%, primarily diabetes treatment). Despite this positioning as a one-stop shop for medical devices, Medtronic’s stock price has stagnated – appreciating just 15% over the past decade and down 8% in the last five years.

This stock performance underscores long-term investor frustration in Medtronic’s growth profile. Investors have been long waiting for a growth inflection due to the company’s attractive end markets and scale, but Medtronic has been delivering underwhelming mid-single digit revenue growth for the past 10 years. Many have speculated that Medtronic’s growth has disappointed due to its strategy of diversification. While Medtech peers like Boston Scientific and Intuitive Surgical are pursuing depth rather than diversification, executing tuck-in merger and acquisitions, and building scale in focused markets, Medtronic has sat on the sidelines since the Covidien acquisition, leaving it with a larger – but slower growing revenue base than peers.

However, for the first time in many years management is sending a message to the market that it not only acknowledges this issue, but it’s doing something about it. That message comes in the form of establishing a Growth Committee and adding as a member newly appointed director Bill Jellison (former vice president and CFO of Stryker). Notably, these actions were taken following engagement by Elliott. The Growth Committee is oriented towards portfolio management, including finding tuck-in M&A opportunities to supplement organic growth, allocating research and development more effectively, and reviewing its existing portfolio of businesses for inefficiencies to pursue future asset sales. Jellison will be a value-added director to that end. In addition, Elliott has shown that even without a board seat for an Elliott principal it can be a valuable active shareholder, particularly with evaluating and executing M&A opportunities.

Medtech has also seen margin challenges in recent years and management is also addressing that by forming an Operating Committee. This committee is focused on creating room in the P&L and gross margin expansion. As is the case with most MedTech businesses, Medtronic has been under a lot of bottom-line pressure since the Covid-19 pandemic. However, while peers have generally experienced 100 to 200 basis points of margin pressure, Medtronic’s gross margins (now around 65%) have eroded approximately 500 bps. This is another area where we have seen Elliott assist portfolio companies as an active shareholder.

While these two committees are new, they will be able to start with a little momentum. Medtronic announced in May that it will be spinning off its diabetes business within the next 15 months, which should help the company focus on its core businesses. There are also two product developments that could meaningfully contribute to long-term growth: (i) PulseSelect, a pulse field ablation system used to treat atrial fibrillation, launched in the U.S. in 2024 and has grown rapidly over the course of this year; and (ii) Symplicity Spyral, a renal denervation product used for the treatment of hypertension, recently received a favorable reimbursement decision from the Centers for Medicare & Medicaid Services that’s being finalized in October, which should significantly increase access and adoption of the product. While these product developments are certainly reasons to be optimistic, more important to shareholders like Elliott is a professional and sophisticated process, and with these operational and governance changes, shareholders should be confident that the company finally has a process that can deliver long-term growth. To paraphrase from the book “Built to Last: Successful Habits of Visionary Companies,” it is the difference between being a time teller and a clock builder. The most successful and enduring companies have been clock builders.

Elliott is one of today’s most prolific activist investors, and it has already successfully completed the activist phase of this engagement. Now is the time for phase two: a turnaround of the business. Elliott has helped add two directors to the board who are purpose-built for this situation. Both Jellison and Groetelaars have extensive medtech experience, with Jellison having served on the boards of two other medtech companies as the result of activist engagement – Masimo for Politan Capital and Anika Therapeutics for Caligan Partners. What makes this engagement unique is that Elliott did not enter into any formal agreement with Medtronic, signaling that management did not see it as necessary and that Elliott is supportive of its efforts. While presently the stage is set for a long-term mutually beneficial relationship between the two parties, Elliott has put itself in position to have unique flexibility should things not go as planned, but we do not expect that they will have to rely on that contingency.

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 a portfolio of activist 13D investments.