On Nov. 25, 2022, I reported that the founder, chairman and CEO of Masimo Corp. (MASI, Financial), Joe Kiani, had bought just under 40,000 shares of the company at an average of $141.46 each. That was an investment of more than $5.62 million, a strong display of confidence in the company.
Now, less than five months later, the stock has risen to $186.83, an increase of $45.37 per share or 32.07%. That’s a gain of $1.79 million and good news for the head of the medical devices company.
But that is a small change compared to what he might make if a controversial plan unfolds as it might.
The dispute began in 2022, when Masimo acquired Sound United. After the acquisition, the share price took a dive based on the belief Masimo had paid too much. As a result, one of the leading shareholders wanted board room changes.
Subsequently, the poison pill was adopted on Sept. 9, 2022. It took the form of an employment agreement that would give Kiani approximately $600 million. The deal would be triggered if a new lead independent director was appointed, if more than a third of the five-member board was voted out in a 24-month period or if he was no longer both chairman and CEO.
As the old saying goes, nice work if you can get it!
However, some shareholders objected vigorously, especially the activist investment firm Politan Capital Management and the California State Teachers’ Retirement System, or CalSTRS.
Politan is a New York-based hedge fund that managed $1.77 billion in assets at the end of 2022. It filed a lawsuit on Oct. 21. In a news release, the firm argued the deal “could result in hundreds of millions of dollars of value being transferred to Chairman and CEO Joe Kiani even if only two of directors on the Board were replaced.”
Politan’s Managing Partner and Chief Investment Officer Quentin Koffey added, “Masimo’s array of defensive measures is extreme: a staggered board, a poison pill, a change of control provision in its CEO compensation that is triggered just by two directors being replaced, and now these bylaws.”
In response, Masimo filed a counterclaim, demanding information about Politan’s significant financial backers and so-called “side-car vehicles” (other undisclosed investors).
Neither side was willing to settle, so the matter ended up in front of a judge (Vice Chancellor in the Delaware Court of Chancery). The judge said, in part, “The annual meeting will be held in June 2023. Politan’s nominees will either win election to Masimo’s Board or they will lose. If they lose, then there may be a practical question of whether this litigation goes forward. If they win, then one or two new fiduciaries will join the Board. That would be a significant event for both the Board and, perhaps, this litigation. Indeed, this matter may then be resolved via the Board’s deliberative processes.”
Assuming the two sides do not find common ground, a trial will take place in September. In the meantime, Masimo will not act on the agreement, despite appointing a lead independent director.
CalSTRS announced on March 3 that it had joined Politan’s legal action. A senior executive said in a news release, “CalSTRS has been a Masimo stockholder for more than a decade and believes an essential part of managing our portfolio is taking a stand against problematic corporate governance practices that impede stockholder rights and raise investment risks.”
Politan is Masimo’s fourth-largest institutional investor, behind Blackrock Inc. (BLK, Financial), FMR LLC (Fidelity Institutional Asset Management) and Vanguard Group Inc. At the end of 2022, it owned 4,739,963 shares worth $885.56 million. CalSTRS owned 83,154 shares worth $15.53 million.
According to 13F filings, six of the gurus followed by GuruFocus had positions in Masimo at the end of 2022. The three biggest holdings were those of Jim Simons (Trades, Portfolio)' Renaissance Technologies (179,700 shares), Baillie Gifford (Trades, Portfolio) (96,135 shares) and Mario Gabelli (Trades, Portfolio) of GAMCO Investors (85,000 shares).
Investors should be aware 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
What are investors, at least those of us who do not run big institutional funds, to do?
I would recommend using extreme caution. First, this fight over changes in control of the company may or may not lead to Kiani receiving that $600 million. If he does, that will come out of the pockets of shareholders, including both retail and institutional investors.
Alternatively, if Politan and CalSTRA prevail, the stock may pop if investors start buying Masimo shares again. Removing uncertainty usually gives share prices a boost—that is usually, but not always.
Second, prudent investors shy away from companies that adopt poison pills. Normally, that means management wants to protect its own interests, whether that is good for shareholders or not.
Sooner or later, the issue will be resolved. If there is a clear finding that eliminates the payout to Kiani, then that may clear the way to invest again. But until then, it is buyer beware.
