Starboard pushes an open door at Becton Dickinson as company seeks to separate its biosciences unit

Business: Becton Dickinson develops, manufactures and sells medical supplies, devices, laboratory equipment and diagnostic products for health-care institutions, physicians, life science researchers, clinical laboratories, pharmaceutical industry and the public worldwide.

Stock Market Value: ~$66.65B ($229.85 per share)

Ownership: ~0.70%

Average Cost: n/a

Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard also has significant experience with its strategic activism. In 57 prior campaigns where it had a strategic thesis, the firm had a 32.96% return versus 14.61% for the Russell 2000 during the same period. Additionally, Starboard has initiated activist campaigns at 24 prior health-care companies and its average return on these situations is 17.65% versus an average of 9.57% for the Russell 2000 during the same time periods.

On Feb. 3, Starboard announced it has taken a position in Becton Dickinson and called for the separation of its life sciences division. Days later, on Feb. 5, the company shared its intent to separate its biosciences and diagnostics solutions business.

Becton Dickinson (BDX) is a global medical technology company comprised of essentially two businesses: (i) MedTech, which consists of the BD Medical (medication delivery and management solutions, advanced monitoring and pharmaceutical systems) and BD Interventional (products for vascular, urology, oncology and surgical specialties) and (ii) BD Life Sciences, which provides products for the collection and transport of diagnostics specimens as well as instruments and reagent systems to detect a range of infectious diseases. Within MedTech, BDX is the market leader in the infusion pumps and prefilled syringes businesses, a position which has been supercharged by the growth in popularity of GLP-1s. These two businesses have historically been similar in size, but MedTech has been growing faster and now accounts for $15.1 billion of revenue and $6.7 billion of earnings before interest, taxes, depreciation and amortization versus Life Sciences contributing $5.2 billion of revenue and $2.0 billion of EBITDA.

The problem here is simple and straightforward: The company operates two distinct businesses that are at different stages with different growth rates and valuation multiples and no real reason to be under the same roof. The MedTech business has a higher growth rate (mid-single digits) than Life Sciences (low-single digits) but a lower valuation multiple (13-times to 14-times) than Life Sciences (upward of 20-times) because MedTech is assessed as a rule of 40 company – that is, its growth rate plus its operating margins should equal or exceed 40. Life Sciences is seen as more structurally stable and immune to things like cyclicality, and it has reduced exposure to reimbursement pressure. Additionally, the presence of major industry players like Thermo Fisher and Danaher give the Life Sciences business a little consolidation value that slightly boosts its valuation multiple.

This is not always a problem, but in BDX’s case, the entire company is trading at 16.8-times EBITDA, closer to the value of its least valuable part. As Starboard has recommended, spinning off or selling the Life Sciences business is a simple solution to a simple problem. The short-term value creation here is straightforward. If separated, the Medtech Business should get a 13-times to 14-times EBITDA valuation based on its growth, while Life Sciences should get a valuation north of 20-times. This alone would result in a valuation north of $110 billion at the low end of the multiple range. But there is additional value creation that could be attained after separation. The ability to better motivate management with the success of their own division and expand the universe of potential investors to two pure-play businesses are just the table stakes in a separation. The real value comes from two separate management teams being able to better focus on and devote resources to their own businesses. In the case of BDX, that could lead to margin improvement through the integration of acquisitions that were somewhat neglected as part of a bigger company. There have been reports of a $30 billion valuation price for the Life Sciences business. This is a valuation slightly below the expected 20-times EBITDA multiple we think it could receive. We expect that is because BDX may retain some parts of the Life Sciences business that synergize with MedTech.

This is not always a problem, but in BDX’s case, the entire company is trading at 16.8-times EBITDA, closer to the value of its least valuable part. As Starboard has recommended, spinning off or selling the Life Sciences business is a simple solution to a simple problem. The short-term value creation here is straightforward. If separated, the Medtech Business should get a 13-times to 14-times EBITDA valuation based on its growth, while Life Sciences should get a valuation north of 20-times. This alone would result in a valuation north of $110 billion at the low end of the multiple range. But there is additional value creation that could be attained after separation. The ability to better motivate management with the success of their own division and expand the universe of potential investors to two pure-play businesses are just the table stakes in a separation. The real value comes from two separate management teams being able to better focus on and devote resources to their own businesses. In the case of BDX, that could lead to margin improvement through the integration of acquisitions that were somewhat neglected as part of a bigger company. There have been reports of a $30 billion valuation price for the Life Sciences business. This is a valuation slightly below the expected 20-times EBITDA multiple we think it could receive. We expect that is because BDX may retain some parts of the Life Sciences business that synergize with MedTech.

Starboard is known as a very diligent, tenacious and committed activist investor that will do whatever is necessary to create value for its investors and other shareholders. When the firm wants board seats, it generally gets board seats. But that is not the case here. Starboard’s “activist” skills might be wasted or not needed here as it appears that in this case, the firm is pushing an open door rather than breaking one down. BDX has already acknowledged this issue and announced that it is considering the divesture of its Life Sciences segment. Whether this is because the company has been considering this anyway or because it heard Starboard loud and clear is irrelevant. Starboard is the type of activist that does not care who gets the credit, as long as the best decisions are made for shareholders.

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.