Pact with activist investor sends Cerner stock soaring
- Cerner announced Tuesday it has reached an agreement with activist hedge fund Starboard Value, setting in motion a series of changes to Cerner's board leadership, financial strategy and operations. The EHR vendor's stock climbed 10.3% after the bell, led by a $1.2 billion boost to its stock buyback program.
- Leadership changes under the agreement include a "board refreshment" that will see the retirement of Mayo Clinic President Emeritus Denis Cortese and the appointment of four new board members — two nominated by Starboard. The hedge fund owns about 1.2% of Cerner's shares.
- Unwieldy expenses have hampered operations at Cerner, and previous plans for improvement from newly-appointed CEO Brent Shafer have failed to rouse shareholders.
Financial analysts were encouraged by the Cerner announcement. Baird's Matthew Gilmor said the actions laid out in the agreement echo changes other shareholders have been wanting Cerner to make. Piper Jaffray analyst Sean Wieland said the company's actions address an "identity crisis" at the company that has been lingering since the passing of CEO Neal Patterson in 2017.
Cerner has been saddled with costly operating woes for the past few years, with operating expense growth increasing at a faster rate than operating income. The trend culminated in a 9.8% leap in fiscal year 2018 that bogged down the company's financial performance and kept earnings results on the low end of estimates. Revenue gains in fiscal year 2018 were buoyed by big bookings that included a 10-year, $10 billion contract with the VA, but were overshadowed by a 19% blow to operating earnings that left shareholders disappointed.
The fiscal year ended with a promise from Shafer that "structure and process changes" were imminent. Shafer's plans were unveiled at an analyst event in February and followed by a 3% dip in shares.
Shafer's blueprint is still underway. During the first quarter of fiscal year 2019, Cerner implemented a string of operating and cost structure tweaks geared toward reducing excess spending. Those changes, according to Cerner, included removing the role of president, eliminating a redundant business unit, collapsing a number of disparate operational functions into a single office and expanding operating margin targets for 2019 and 2020.
Those targets now sit at 20% and 22.5%, respectively.
Cerner has hired third party consultants to conduct a review of the changes it has made so far and identify potential areas where inefficiencies can be reduced. The review will be overseen by a five-member board committee, made up of all four newly-appointed directors and established specifically to supervise improvement efforts borne out of the report's findings.
Follow Tony Abraham on Twitter