Synergy Pharmaceuticals: Activist Group Reaches 26.1 Million Shares
May 6, 2018 1:08 PM ET|
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About: Synergy Pharmaceuticals, Inc. (SGYP)
Jose Solorio
Long/short equity, special situations, healthcare, options
(650 followers)
Summary
The activist group which is pledging to vote against an increase on management compensation now represents the largest block of voting shares.
Management should tie compensation and share awards based on a significant appreciation of the shares. It needs to align its interests with those of shareholders immediately.
How management reacts to this movement speaks about whether it is actually shareholder friendly or not. Investor relations representative Gem Hopkins has not yet opened dialogue with the group.
An open source letter has been written to the CEO of the company. Would he address key points at the conference call?
Management should do a press release announcing the hiring of investment bankers to assist on the process of finding a partner.
We could be on the verge of witnessing how shareholder activism will occur on the decades to come. In less than two weeks, 760 shareholders from both retail and institutional background have joined to form one of the biggest activist campaigns against a company's management in recent years. Synergy Pharmaceuticals (NASDAQ:SGYP) is now potentially the target of an activist.
The group has lost no time contacting possible candidates. At current prices, I strongly urge people waiting on the sidelines to take a position as the risk-reward ratio has taken a very favorable turn for the bulls. Also, if your risk profile is favorable, this is a good time to consider averaging down a position as the company is trading as if it were heading towards bankruptcy. I recommend investors to listen up to the upcoming conference call and listen to see whether any of the points raised up on the open letter to Troy Hamilton are addressed by the management team.
Source: Synergy Activist Group
No response from investor relations
What's troubling to me is that Gem Hopkins from the investor relations team hasn't opened dialogue with the activist group even after being contacted. It should be obvious that shareholders are outraged at the job management has done and also about the proposals brought up for the shareholders meeting. An open dialogue with management could work toward a mutually beneficial resolution. If she is unwilling to talk to the largest group of investors in the company, that should be the largest red flag to date about how sincere the company is to its investors.
Salaries and options should be tied to share price recovery
There's no trust in management and shareholders (myself included). Most think that management would rather dilute shareholders than let go of the control of the company. The first way to fix that problem would be to give significant bonuses to the management team tied to a price recovery above $3.50 or $4 a share. I know that's no ideal for many here, but at least it would be a step on the right path.
A press release stating that the 10 million in new shares would only be awarded once a certain share performance metric is achieved would go a long way towards regaining shareholder trust and perhaps even sufficient votes for the resolution to pass at the annual meeting. The problem is that it seems the management team wants to award them at current prices further diluting the value of each share. Management keeps winning at the expense of its shareholders.
Unless further clarification comes from management as to how those shares will be awarded, I recommend to vote against it. Also voting against adding another 100 million shares to the authorized block should be a no brainer at this point.
Press release stating that investment bankers have been hired
It's possible that some investment bankers are already involved on helping the company partner, but the problem is the lack of communication with the investment community. Management should immediately hire Goldman Sachs, Morgan Stanley and Credit Suisse and possibly others to help them negotiate with possible partners. Hiring multiple investment banks helps the process as banks are often aggressive on trying to bring the best offer to the table in order to get the fees associated with a successful transaction.
A press release doesn't mean a partnership is going to happen, but at least it buys the company time and goodwill with its shareholders. It helps because it makes it look active and on charge of the market narrative. It also helps keep the shorts at bay due to the risk that at any moment a deal might be announced.
An open letter to the CEO
The following letter was collectively wrote on an open source format and sent to the CEO of the company Troy Hamilton.
I would love to see whether the CEO of the company acknowledges the group and addresses its concerns. At the end of the day, if he ignores the group, it would show just how disconnected management is from what's happening with the market.
The most interesting proposal is whether he would be willing to take a temporary pay cut until the share price recovers or to take a higher percentage of his salary tied to a share price recovery.
No insider purchases yet
Right now, we are on a quiet period, and insiders can't trade stock, but if after the conference call insiders continue to not buy any shares at the current low prices, then I would get really concerned. If there's value here, insiders should be the first ones to jump hand over fist to scoop shares at these prices.
Conclusion
The next couple of weeks should provide us with a lot of information about where we stand as shareholders of the company. I reiterate that the biggest risk to this company is management itself. But even with all the adverse decisions and proposals, I believe this price is a real bargain for the shares of Synergy and that most of the negatives are already priced in at current prices.
Finally, I would like to leave you with access to the latest email communication from the Synergy Activist Group.
Disclosure: I am/we are long SGYP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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