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Starboard Value Sets Its Eyes on MedAssets

Starboard Value, the activist investor firm that helped instigate the Staples and Office Depot merger, is making another call for MedAssets Inc. (NASDAQ: MDAS) to up the ante. In an open letter to the company’s chairman and CEO, Haley Wise, the activist firm outlines a plan to create more value, reduce operating expenses and improve capital allocation.

Prior to sending the letter, Starboard disclosed that it owns approximately 8.7% of MedAssets’ outstanding shares. This makes Starboard one of the largest shareholders in the company.

Starboard is an investment management firm that invests in undervalued and underperforming public companies. Its approach to such investments is to actively engage with management teams and boards of directors in a constructive manner to identify and execute on opportunities to unlock value for the benefit of all shareholders.

According to the open letter, Starboard listed a few areas that MedAssets can improve in order to better return capital to shareholders:

Over the past ten years, MedAssets has spent almost $1.9 billion on acquisitions and capital expenditures, yet the current enterprise value of the company is only $2.2 billion. During this time period, MedAssets acquired nine different companies. Many of these companies were acquired at premium valuations, were not properly integrated, and have generated a negative return on capital. Given the discounted valuation at which MedAssets is trading and considering the Company’s acquisition track record, we believe that management should be deploying MedAssets’ excess free cash flow towards share repurchases rather than additional acquisitions. While there may be other bolt-on acquisition opportunities for MedAssets in the future, it is critical that you first integrate the prior acquisitions and improve the Company’s existing operations before pursuing additional acquisitions.

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In terms of the cost structure, Starboard said:

Based on our research, we believe that many of MedAssets’ prior acquisitions have not been fully integrated and often were managed as separate business units with duplicative overhead costs. This has resulted in excessive corporate overhead and selling, general, and administrative (SG&A) expenses. While we recognize that MedAssets has an industry-leading ‘sales-driven’ culture, many years of acquisition-fueled growth has left the Company with a lack of cost discipline and operational focus. The magnitude of the potential cost savings opportunity becomes more apparent when you compare MedAssets’ profitability to its closest public peer, Premier. While there are some differences between MedAssets and Premier, we believe that MedAssets has a superior business mix that should result in higher, not lower, profitability than Premier …

We have conducted a thorough evaluation of MedAssets’ cost structure and tried to identify cost saving opportunities through a combination of top-down comparisons and bottoms-up analysis. Our conclusion is that there is an opportunity to reduce operating expenses by at least $60 – $90 million. We believe that you can achieve this dramatic reduction in operating expense while simultaneously streamlining and refocusing the Company in order to capture exciting new growth opportunities, such as gaining share among non-acute healthcare providers.

As a result, the activist firm believes that MedAssets could be worth approximately $37.29 per share based on its historic EV/EBITDA multiple of 9.1 times. However, valuing the company based on Premier’s current 10.7-times valuation would imply a $46.18 share price. Ultimately Starboard believes that addressing these issues should reduce the discount at which MedAssets’ currently trades relative to Premier, making a higher multiple possible.

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Starboard concluded the letter saying:

As one of the largest shareholders of MedAssets, we believe there is a tremendous opportunity to improve the value of the Company. We are excited about the future of the Company, and we look forward to working constructively with you to achieve the common goal of maximizing shareholder value.

Shares of MedAssets were down 3.2% at $22.84 Tuesday morning. The stock has a consensus analyst price target of $21.72 and a 52-week trading range of $17.00 to $23.90.

By Chris Lange


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