6 Goals for Fixing Genzyme: Xconomy’s Q&A With Relational Investors’ Ralph Whitworth

1/21/10Follow @bvbigelow

Former T. Boone Pickens protégés David H. Batchelder and Ralph V. Whitworth co-founded San Diego-based Relational Investors in 1996, and their privately owned asset management firm now serves some of the largest pension funds in the world. Whitworth, a lawyer who was president of the Washington D.C.-based United Shareholders Association before joining Batchelder in San Diego, is also viewed as a prominent authority on corporate governance. He has combined that expertise with Relational’s clout as a major investor to improve the operations of poorly performing and undervalued companies—and to encourage boardroom reforms.

As an example, Whitworth was sharply critical of Robert Nardelli’s compensation package as CEO of Home Depot, and in 2006 Relational launched a campaign questioning Nardelli’s leadership. After Nardelli orchestrated an imperious shareholder meeting, Relational called for Nardelli’s ouster—and the CEO was dismissed in January 2007 (with an estimated $210 million severance package).

Whitworth and Relational instigated similar changes at Sprint Nextel, Mattel, and J.C. Penney. In late 2008, he and his firm (which currently manages a total of $6.5 billion) set their collective sights on turning around Genzyme, eventually acquiring a 4 percent stake in the ailing Cambridge, MA-based biotech. Earlier this month, Relational demonstrated its willingness to work with Genzyme’s management by calling a cease-fire in the form of a “mutual cooperation agreement.”

Whitworth agreed to answer some Genzyme-related questions when I caught up with him this week.

Xconomy: Why Genzyme? Can you describe the criteria or the general process that Relational uses when it decides to take a stake in a company?

Ralph Whitworth: We look for companies that are trading at discounts to their intrinsic value—despite the fact that they have low financial leverage, strong defensible core businesses, and growing cash flows. Invariably this discount exists because investors do not expect management to effectively reinvest the projected profits. This negative expectation is typically caused by a poor history of investment outside of the core franchise and/or from chasing growth within the core franchise in the face of maturing industry conditions.

X: Does Relational prepare a playbook for change before it begins to acquire shares? As Relational accumulates shares, is there a threshold for contacting the company to recommend operational or management changes?

RW: Yes, we map out an engagement program prior to making our initial investment. We try to gauge the likelihood of change and potential upside. Typically before we meet with management, we’ll buy some sort of toe-hold in the company. Before presenting recommendations for change we typically invest from 15 to 25 percent of our targeted long-term investment level. For example, if we had planned to invest $400 million over a number of years, we’d initially invest $60 million to $100 million before continuing forward. That’s just an example. We step into an investment over time as a risk-management tool.

X: Are there any other technology or life sciences technology companies that you believe are trading at a discount to their intrinsic value?

RW: I’m sure there are others. But … Next Page »

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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