Company: Illumina (ILMN)
Business: Illumina develops, manufactures and markets life science tools and integrated systems for large-scale analysis of genetic variation and function. It operates through Core Illumina and Grail. Grail, which was acquired in August 2021, is a health-care company focused on early detection of multiple cancers. Grail’s Galleri blood test detects various types of cancers before they are symptomatic.
Stock Market Value: $35.4B ($224.55 per share)
Activist: Carl Icahn
Percentage Ownership: 1.39%
Average Cost: n/a
Activist Commentary: Carl Icahn is the grandfather of activist investing and a leading pioneer of modern-day shareholder activism. When most people think of Icahn, health-care companies are generally not their first thought. However, Icahn has had extensive activist experience at health-care companies. In nine prior concluded activist engagements in the health-care industry going back to ImClone Systems in 2006, Icahn has averaged a 66.27% return versus -0.11% for the S&P 500. In situations in which he received board representation, that average return goes up to 93.90% versus 17.58% for the S&P 500.
On March 13, Carl Icahn sent a letter to the company’s shareholders announcing his intention to nominate Vincent J. Intrieri, Jesse A. Lynn and Andrew J. Teno for election to the company’s board at the 2023 annual meeting. Additionally, Icahn criticized the company’s acquisition of Grail, which he says has led to $50 billion of value destruction.
Behind the Scenes
Illumina created Grail as a business unit in late 2015 and spun it out in January 2016. Less than five years later, in September 2020, Illumina agreed to acquire Grail back for $8 billion. They closed the acquisition a year later despite not getting approvals from the Federal Trade Commission or the European Union and with indications that there would be resistance from one if not both regulators. This angered the European Commission, which ultimately blocked the deal and levied the maximum fine. Illumina has appealed the decision and set aside a $453 million liability reserve for the potential European fine. Since the acquisition closed in August 2021, Illumina’s stock price fell by 57% from $522.89 to $225.88, eliminating $47 billion of shareholder value. To put that into perspective, the entire market cap of Silicon Valley Bank prior to its implosion was less than $16 billion.
Icahn thinks Illumina is a great company but a quintessential example of what is wrong in corporate America. He takes issue with Illumina spinning off Grail cheaply just to overpay for it less than five years later, but that is only the beginning. Reasonable boards overpay for companies all the time, but we know of no other board that has ever consummated an $8 billion acquisition knowing that the regulators were likely going to have a problem with it. Icahn said this is at least gross negligence and later said that Illumina directors that approved the acquisition could be “personally liable.” He would like to see Grail divested from the company, potentially through a rights offering, and management focused on the core business of Illumina.
So, Icahn does what Icahn does: He took a position in the company and nominated to the nine-person board three directors who he thinks can come in, right the ship and restore the shareholder value that has been lost. One might expect that a company that has destroyed so much shareholder value in so little time would welcome experienced and fresh eyes to turn things around. But Illumina rejected Icahn’s nominees because “the board has determined Icahn’s nominees lack relevant skills and experience.” Icahn’s nominees have significant restructuring, corporate governance, M&A, capital markets and legal experience — five things the company desperately needs. The current board has nine directors, seven of whom have a science and engineering background and two of whom have a financial background. Not one director is an investor and even more incredible is not one of the nine directors has any legal background or experience whatsoever. This board made an unprecedented decision to close an $8 billion acquisition in the face of resistance from both U.S. and European regulators without having anyone with any legal experience on the board and despite having to know that at the very least this decision was going to embark them on a multi-year legal battle. Moreover, even after this battle started, they did not add anyone with legal experience to the board. Now, when Icahn suggests they add to the board Jesse Lynn, general counsel to Icahn Enterprises with 27 years of legal experience, the board responds that he lacks the relevant skills and experience.
A board that makes mistakes that cost shareholders tremendous value is obviously not a good thing, but it is reparable. What is much worse is a board that cannot even see the problems and the mistakes, and it also thinks the situation is under control as shareholder value continues to erode. That is what we have at Illumina. This can be fixed 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 the issues, they have the restructuring and M&A experience to help management execute a plan to restore shareholder value. But most of all, they have tremendous skills and experience in the most important thing this board needs that they fail to 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 activist 13D investments.