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Company: Illumina (ILMN)
Business: Illuminated develops, manufactures and markets life science tools and integrated systems for the large-scale analysis of genetic variation and function. It works through Core Illumina and Grail. Grail, which was acquired in August 2021, is a healthcare company focused on the early detection of multiple cancers. Grail’s Galleri blood test detects various types of cancers before they are symptomatic.
Market value: $35.4 billion ($224.55 per share)
Activist: Carl Icahn
Percentage of ownership: 1.39%
Average cost: n / A
Activist Comment: Carl Icahn is the grandfather of activist investing and one of the foremost pioneers of modern shareholder activism. When most people think of Icahn, healthcare companies aren’t usually their first thought. However, Icahn has extensive experience as an activist in healthcare companies. In nine previous activist engagements in the healthcare industry dating back to ImClone Systems in 2006, Icahn has averaged a return of 66.27% compared to -0.11% for the S&P500. In situations where it has been represented on the board of directors, this average return rises to 93.90% compared to 17.58% for the S&P 500.
What is happening?
March 13, Carl Icahn sent a letter to the shareholders of the company announcing his intention to nominate Vincent J. Intrieri, Jesse A. Lynn and Andrew J. Teno for election to the company’s board of directors at the 2023 annual meeting. Additionally, Icahn criticized the acquisition of Grail by the company, which it claims resulted in the destruction of $50 billion in value.
In the wings
Illumina created Grail as a business unit in late 2015 and spun it off in January 2016. Less than five years later, in September 2020, Illumina agreed to buy Grail for $8 billion. They closed the acquisition a year later despite the lack of Federal Trade Commission or European Union approval and with indications that there was would be the resistance of one if not of the two regulators. This angered the European Commission, which ultimately blocked the deal and collected the maximum fine. Illumina appealed the decision and set aside a liability reserve of $453 million for the potential European fine. Since the acquisition closed in August 2021, Illumina’s share price has fallen 57% from $522.89 to $225.88, wiping out $47 billion in shareholder value. To put that into perspective, Silicon Valley Bank’s total market capitalization before its implosion was less than $16 billion.
Icahn thinks Illumina is a great company, but a prime example of what’s wrong with corporate America. He takes issue with the fact that Illumina sold Grail cheaply only to overpay for it less than five years later, but that’s just the beginning. Reasonable boards overpay companies all the time, but we don’t know of any other board that has ever done an $8 billion acquisition knowing that regulators were probably going to have a problem with it. Icahn said it was at least gross negligence, and later said the Illumina directors who approved the acquisition might be “personally liable.” He would like to see Grail part ways with the company, potentially through a rights offering, and management focused on Illumina’s core business.
So Icahn is doing what Icahn is doing: He’s taken a job at the company and appointed three directors to the nine-person board who he believes can come in, right the ship, and restore the shareholder value that’s been lost. You would expect that a company that has destroyed so much shareholder value in such a short time would welcome both experienced and fresh eyes to turn things around. But Illumina rejected Icahn nominees because “the board determined that Icahn’s nominees lacked relevant skills and experience”. Icahn candidates have significant experience in restructuring, corporate governance, mergers and acquisitions, capital markets, and law — five things the company desperately needs. The current Board of Directors has nine directors, seven of whom have a background in science and engineering and two have a background in finance. None of the directors are investors and, even more incredible, none of the nine directors have any legal training or experience. This board made an unprecedented decision to close an $8 billion acquisition in the face of resistance from US and European regulators without having anyone with legal experience on the board and despite knowing that at the very least this decision would embark them on a legal battle of several years. Also, even after this battle started, they didn’t add anyone with legal experience to the board. Now, when Icahn suggests adding Jesse Lynn, general counsel for Icahn Enterprises with 27 years of legal experience, to the board, the board responds that he lacks the necessary skills and experience.
A board that makes mistakes that cost shareholders enormous value is obviously not a good thing, but it can be fixed. What’s far worse is a board that can’t even see the problems and mistakes, and also thinks the situation is under control as shareholder value continues to erode. That’s what we have at Illumina. This can be resolved by adding Icahn’s three nominees to the board. Not only do they have the legal, capital markets and corporate governance experience to help the board spot problems, they also have the restructuring and mergers and acquisitions experience to help management execute a shareholder value restoration plan. Most importantly, they have tremendous skills and experience in the most important thing this board needs that they don’t realize: holding management accountable.
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 13D activist investments.