Irvine-based Masimo Corp. (Nasdaq: MASI) and activist investor Quentin Koffey of New York’s Politan Capital Management spent months arguing whether the latter should join the board of directors for one of Orange County’s most valuable public companies, one whose valuation took a steep hit in early 2022 following its largest-ever acquisition.
“Masimo’s unprecedented collapse in value reveals a crisis of confidence,” Koffey wrote in a May 23 letter to shareholders. “Undisciplined capital allocation and an unfocused strategy have gone unchecked and severely depress valuation.”
“Electing Mr. Koffey would derail Masimo and risk the loss of its senior leadership and engineering teams,” Masimo countered in a June 20 statement.
Shareholders of Masimo, a maker of oxygen and blood monitoring devices, spoke loudly last week, voting 65% for Koffey and 76% for his ally Michelle Brennan, the company reported in a filing.
Each of the Politan nominees won 17 of the 20 largest shareholders who weren’t insiders, said Politan, which has spent $15 million on the proxy battle.
Change Underway?
“Today’s reported vote tally confirms a high desire for change among shareholders,” Piper Sandler analyst Jason Bednar wrote in a June 26 vote.
“It does seem increasingly likely that change is eventually coming to MASI.”
Bednar said options may even include Chief Executive Joe Kiani stepping away from the company he founded in a garage in 1989.
Kiani won’t be stepping down, a source close to the company told the Business Journal.
Kiani lost two allies on the five-member board, as his incumbent nominees, Michael Cohen and Julie Shimer, were voted out.
“We are disappointed to have lost the valuable contributions of two very qualified and capable board members,” the company said in a statement.
Shares were largely unchanged in the two trading sessions after Politan’s announcement, hovering around $162 and an $8.6 billion market cap.
9% Owner
Politan began stocking up on shares a year ago after Masimo fell 37% in the trading session following its $1 billion purchase of Sound United, a maker of high-end speakers for consumers. Politan now owns 9% of the company’s stock, an amount that represents an $800 million investment.
Kiani counts a similar stake in the company, according to regulatory filings.
Masimo argued that the Sound United acquisition would help expand its medical devices to consumers and thus its total addressable market from $9 billion to $171 billion.
Politan disagreed, saying Sound United has little intellectual property and was a waste of Masimo’s resources.
“Upon announcing the $1 billion cash acquisition, Masimo’s market valuation fell by over $5 billion,” Koffey wrote. “At five times the purchase price, such a loss of value is unprecedented.
It is 19 times the standard deviation seen in U.S. public markets following a deal, and three times worse than the second largest decline in the past decade.”
In the past year, the two sides traded accusations regarding compensation, negotiations and qualifications.
Masimo adopted bylaws that would have required anyone nominating directors to identify their own clients and say if they planned to nominate directors elsewhere. After Politan sued in a Delaware court, Masimo dropped the requirements.
Before the vote, Masimo lost the support of two proxy advisory firms, Institutional Shareholders Services and Glass Lewis, which both urged shareholders to elect the Politan nominees.
Large mutual funds often use the advice of these firms to guide their votes; Masimo said prior recommendations from those firms about its operations proved poor in retrospect.
“The fundamental issue is the lack of accountability to shareholders,” ISS said in its analysis. “MASI is a public company that operates like a private business and is disregarding shareholders in the process. The board needs to repair its relationship with shareholders and needs to credibly establish an ability to effectively oversee management.”
Pivotal Time
The board shakeup comes at a crucial time, when Masimo is pivoting towards consumer products and is battling Apple Inc. (Nasdaq: AAPL), the world’s most valuable publicly traded company, in multiple lawsuits.
The proxy vote loss came a week after Masimo announced its newest products, Denon PerL and PerL Pro True Wireless Earbuds, to allow users to create a personal audio profile to optimize the sound quality of their headphones. Masimo has estimated the total addressable market for hearing products could be as much as $85 billion.
The proxy vote came about two months after a mistrial was declared in Masimo’s $1.85 billion lawsuit against Apple for alleged intellectual property theft.
Kiani, who said he plans to spend more than $100 million fighting Apple, has said he intends to retry the case.
Separately, Masimo has a case against Apple before the U.S. International Trade Commission, which is expected to rule this summer on an initial judgment in favor of Masimo.
