Key Highlights
– Cerner cooperates with activist hedge fund Starboard Value LP
– Four New Directors to Be Immediately Appointed to the Cerner Board of Directors
– Commitment to Adjusted Operating Margin Targets for Q4 2019 and Q4 2020 of 20% and 22.5%
– Creation of Finance and Strategy Committee of the Board to Oversee Operational Improvement Initiatives
– Increases Share Repurchase Authorization Resulting in $1.5 Billion Available for Repurchase
Cerner Corporation, today announced that the Company has entered into a cooperation agreement (the “Cooperation Agreement”) with activist hedge fund Starboard Value LP that will help drive the next phase of profitable growth and value creation. The Cooperation Agreement includes a Board refreshment plan, operational improvement initiatives, commitments for operating margin targets, a new Finance and Strategy Committee of the Board and an expanded capital return program to drive the next phase of profitable growth and value creation. Cerner shares more surged more than 15% in early trading on Tuesday after the announcement.
Newly Appointed Board of Directors
The Company’s Board of Directors (the “Board”) has appointed four new directors, effective immediately:
– John Greisch, former President and Chief Executive Officer of Hill-Rom Holdings, Inc.
– R. Halsey Wise, former Chairman and Chief Executive Officer of MedAssets Inc.,
– Melinda Mount, former President of AliphCom, Inc. (d/b/a Jawbone)
– George Riedel, former Chairman and Chief Executive Officer of Cloudmark, Inc. and a former Senior Partner of McKinsey & Co.
In addition, the Denis Cortese is retiring from the Board at the end of his term and will not stand for re-election. Following the Annual Meeting, the Board will comprise 10 members, nine of whom are independent. With Mr. Cortese’s retirement, the previously announced retirement of co-founder Cliff Illig, and the additions of the four new directors, Cerner will have refreshed more than one half of its Board since 2017.
Operational Improvement Initiatives
Cerner is making a series of changes to its organizational structure, go-to-market philosophy, and capital allocation program. Notably, Cerner has taken the following actions:
– Eliminated the President role and created a more client-focused organization under the Chief Client Officer
– Eliminated the Strategic Business Unit (SBU) structure, which has streamlined operations by reducing redundancy, improving efficiency and focusing the organization on profitable growth areas and client commitments
– Undertaken a comprehensive portfolio review to drive efficiencies and focus within Cerner’s product development teams
– Centralized operational functions that were formerly spread across different leaders under the Chief Operating Officer
– Announced the intent to initiate a dividend, significantly increase the share repurchase authorization and focus on free cash flow generation by linking it to executives’ variable compensation
– Committed to operating margin expansion resulting from anticipated benefits of the new operating model and additional efficiencies expected to be identified in the new operating structure
– Formed a new Finance and Strategy Committee of the Board to oversee operational and financial improvement initiatives, comprising five members, including Mr. Greisch as Committee Chair, Messrs. Riedel, Wise and Zollars and Ms. Mount.
The Finance and Strategy Committee will work closely with management and AlixPartners as Cerner executes its strategy to achieve the operational targets identified. In addition to the Finance and Strategy Committee, each of the four newly appointed directors will join a minimum of one additional Board committee.
Currently, Cerner is focused on reducing operating expense and generating other efficiencies that will improve its adjusted operating margin, with targeted adjusted operating margins of 20% for the fourth quarter of 2019 and 22.5% for the fourth quarter of 2020
Share Repurchase Authorization
Cerner has approved an amendment to its stock repurchase program, authorizing the repurchase of an additional $1.2 billion of its common stock. When combined with the $0.3 billion of authorization remaining on the program that was approved in May 2018, the total authorized amount available for repurchase is approximately $1.5 billion. The Company intends to fund the repurchase program with cash from operations and by issuing debt
Cooperation Agreement with Starboard Value LP
Starboard, which owns approximately 1.2% of Cerner’s outstanding shares, has agreed to vote all of its shares in favor of Cerner’s nominees at the Annual Meeting and has entered into other customary standstill and voting commitments.
