Generally speaking, we do not like to bring CEOs back from a past "list of CEOs to go." James Tobin of Boston Scientific Corp. (NYSE: BSX) has somehow managed to hang on to his job and continue to destroy shareholder value. This is not just a poor job on his part, but it is becoming a poor job on part of the board of directors who have a fiduciary duty to do what is best for the company. Tobin deserves no reprieve for even more reasons than we outlined before.
As with all CEOs to go, this never revolves purely around shareprices. There are many companies which have horrible shareperformance. We are also in the midst of a recession. Butshareholders who have been hoping over the last year have found outwhat a horrible investment strategy that "hoping" can be. That is alsoafter having to stomach shar,p losses when the stock market was thenational hobby and stocks were rising.
In early 2004 this stock was above $40 and had enjoyed an incrediblestock performance from the beginning of 2001 to early 2004. Ancienthistory. Shares sat under $13.00 at the end of last year when wecalled Tobin out the first time. Now they sit under $7.00 and haveeven flirted with $5.00 in the peak of the market selling.Almost every attempt at a rally was sold off and things got so badover the last three months that you would think BSX is a tech stock orin an economically sensitive sector. This performance had looked likea downward staircase, but it recently got worse and it has fallen bymuch more than Johnson & Johnson (NYSE: JNJ) andMedtronic (NYSE: MDT).
Co-founder Peter Nicholas (Jr.) (Chairman) and co-founder and directorJohn Abele are only making matters worse. These two have been gettingmargin call after margin call and have unloaded a combined stock amountof more than $400 million. The sad thing is that Tobin recentlyaddressed this and had no answers and no solutions other than statingit was only share price related and that he did not know when thatselling would end other than soon. For Tobin to not say he is working with the founders to bring this margin call selling to an end is showing he has no ability to even pretend at being a stock strategist. Investors hate it when they see massselling by directors every week, particularly as most investors don’tknow why the selling is happening.
Nicholas is only a few years older than Tobin, and he needs to step inon an interim basis. Of course, he also needs to clean the slate andtake care of whatever liabilities he personally has so that the insiderselling from margin calls is formally over and done.
In June, the company extended Tobin’s tenure but COO Paul LaViolette hadto walk the plank. Tobin hid behind "integrating acquisitions takingall his time" and the company’s line was that Tobin was not in the day-to-day operations of the whole company during that period. That is agreat excuse for a CEO to be off tending to bad investments.
The 2006 Guidant buyout valued around $27 billion in stock and debt isnow almost 3-times the entire market cap of Boston Scientific today.In fact, the company lists goodwill and intangibles on the books atmore than $24.4 billion. It sounds like these guys better get on theball and do a massive goodwill write-down. You could even argue that ithas ill-will on its balance sheet by now.
Boston Scientific had been reviewing units and operations for possiblesale, but this is unlikely to yield anything of size now. BostonScientific is still in the drug coated stent business, but this fieldhas become more crowded and is not as profitable as before.
Wall Street analysts have thrown in the towel long ago. Nothing new isbrewing there and an upgrades or mild defense of the stock was just achance to sell at higher prices. The average target was about $16.00last year and now this target is closer to $12.00. When we run a barebones balance sheet analysis, we see no real value that would throw outany massive floor anywhere close to even these low share prices. Wewould expect an asset write-down that makes this sound like a troubledbank trying to value its toxic assets.
Tobin has has been with BSX since 1999, and he served as Biogen’sPresident & CEO from 1997 to 1999. With a Harvard M.B.A., Tobin isprobably not at all incompetent and we admit that there was aperiod of time that the company flourished. But the current path andthe path of recent years is not working at all. The leverage is highand there seems to be little value in the stock outside ofcomparing it to the past. The problems have only grown and happenedunder his tenure. We think the the COOdeparture this year was throwing blame partly on the wrong person, orat least it should have been equally on Tobin.
What more can we say? Our thought is that this could be worth an extra20% if Jim Tobin would get the hell out of the way. It isn’t workingunder his reign. Shareholders who bought into this thought thatmedical devices were growth stocks or at least defensive stocks. Thatis true at most similar companies. Just not at BSX and not under Mr.Tobin. If there is no clear path and no cleaning of the slate, we’dexpect a shareholder revolt to come on strong early in 2009.
If you go through the list of 2008 CEO’s to go, almost all of thosecalled out have moved on by now and many in the same strategic sense weoutlined. If you go through our list of 2007 CEO’s to go, you’ll seethat most have also moved on or have adopted similar changes.
Jon C. Ogg
December 5, 2008