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Company: Illumina (ILMN)
Business: Enlightenment develops, manufactures and markets life science tools and integrated systems for large-scale analysis of genetic variation and function. It works over Core Illumina and Grail. Grail, acquired in August 2021, is a healthcare company focused on the early detection of multiple types of cancer. Grail’s Galleri blood test detects different types of cancer before they become symptomatic.
market value: $35.4 billion ($224.55 per share)
Activist: Carl Icahn
Percentage ownership: 1.39%
average cost: n / A
Activist Comment: Carl Icahn is the grandfather of activist investing and a leading pioneer of modern shareholder activism. When most people think of Icahn, healthcare companies aren’t generally their first thought. However, Icahn has extensive activist experience at healthcare companies. In nine previously completed healthcare activist engagements dating back to ImClone Systems in 2006, Icahn has averaged a return of 66.27% versus -0.11% for the S&P500. In situations where he served on the board, that average return rose to 93.90% versus 17.58% for the S&P 500.
What’s up?
On March 13, Carl Icahn sent a letter to the company’s stockholders 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. In addition, Icahn criticized the company’s acquisition of Grail, which he says resulted in a $50 billion worth destruction.
Backstage
Illumina formed 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 back Grail for $8 billion. They completed the acquisition a year later, despite receiving no approvals from the Federal Trade Commission or the European Union and with indications there would be opposition from one, if not both, regulators. This angered the EU Commission, which eventually blocked the deal and imposed the maximum penalty. Illumina has appealed the decision and provided a $453 million liability reserve for the potential European fine. Since the closing of the acquisition in August 2021, Illumina’s share price has fallen 57% from $522.89 to $225.88, losing $47 billion in shareholder value. To put that in perspective, Silicon Valley Bank’s total market cap prior to its implosion was less than $16 billion.
Icahn thinks Illumina is a great company, but a prime example of what’s wrong with American companies. He struggles with Illumina spinning off Grail cheaply only to overpay for it less than five years later, but that’s just the beginning. Sensible directors consistently overpay for companies, but we don’t know of any other director who has ever completed an $8 billion acquisition knowing that regulators would likely have a problem with it. Icahn said this was at the very least gross negligence and later said that Illumina directors who approved the acquisition could be “personally liable.” He would like to see Grail divested from the company, possibly through a rights offering, and for management to focus on Illumina’s core business.
So Icahn does what Icahn does: He accepts a position with the company and nominates three directors to the nine-member board who he believes can come and fix the ship and restore lost shareholder value. One might expect that a company that has destroyed so much shareholder value in such a short period of time would welcome experienced and fresh eyes to turn things around. But Illumina rejected Icahn’s nominees because “the Board has determined that Icahn’s nominees lack relevant skills and experience.” Icahn’s nominees bring extensive experience in restructuring, corporate governance, M&A, capital markets and law – five things the company badly needs. The current board consists of nine directors, seven of whom have a science and engineering background and two have a financial background. None of the directors is an investor, and even more incredible, none of the nine directors have any legal background or experience. This board made an unprecedented decision to complete an $8 billion acquisition against opposition from both US and European regulators, without having anyone with legal experience on the board and despite needing to know that this decision would at least affect them would embark in a multi-year legal battle. Furthermore, even after starting this fight, they didn’t add anyone with legal experience to the board. When Icahn proposes that Jesse Lynn, General Counsel of Icahn Enterprises with 27 years of legal experience, be added to the board, the board responds that he lacks the skills and experience to do so.
A board that makes mistakes that cost shareholders tremendous value is obviously not a good thing, but it is fixable. Even worse is a board that doesn’t even see the problems and mistakes and also believes the situation is under control as shareholder value continues to decline. We have that at Illumina. This can be remedied 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 identify issues, but they also have the restructuring and M&A experience to guide management in executing a plan to: Support recovery of shareholder value. 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 Founder and President of 13D Monitor, an institutional research service on shareholder activism, and Founder and Portfolio Manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.