SurModics Inc (SRDX)

[Democritus_of_Abdera]

Kensey Nash as Ramius precedent ...

As stated in a prior message, I’m striving to determine if Ramius’ interest in SRDX is likely to be beneficial or detrimental to small investors such as myself. To make this determination, I’m evaluating the SEC documents detailing the history of Ramius’ involvement with companies similar to SRDX. This post relates to Ramius’ relationship with Kensey Nash. My previous post outlined Ramius’ relationship with Datascope (#msg-57001993).

Ramius’ modus operandi is to identify undervalued companies, purchase a substantial percentage of the outstanding shares, nominate directors for the Board, and, once having Board representation, strive to unlock the underlying value as quickly as possible. ... Note that David Danztker was nominated to the Datascope Board and Jeffrey Smith was nominated to the Kensey Nash Board. These are two of the three Ramius nominees to the SRDX Board.

At the time that Ramius started accumulating KNSY shares (July 2007), Kensey Nash designed, developed and manufactured resorbable endovascular and orthopedic devices, notably the Angio-Seal vascular closure device which was licensed to St Jude Medical. They also sold a variety of endovascular products, primarily guidewire and catheter technologies. Kensey Nash had not declared or paid cash dividends and, per their FY2007 10K, they did not anticipate paying dividends on the common stock in the near future. The FY2007 revenue was about $70M, with about $4M operating income. They had about $35M cash and investments and $65M long-term obligations. During FY2006 and FY2007, KNSY’s stock price was $22-$33/share.

On July 2, 2007 Ramius reported that it had acquired 9.9% of KNSY’s shares for $23-$27/share. Ramius’ share count had increased to 20.8% two months later. Ramius stated that they had initiated their action based upon the advice of Admiral Advisors. Admiral Advisors had recommended that KNSY refocus its efforts and resources on its core biomaterials business and significantly reduce spending and management effort on the endovascular business and its associated direct sales force. Admiral Advisors also highlighted its belief that KNSY should consider using excess cash resources to repurchase shares in a Dutch auction tender offer. The following statement in Ramius’ detailed letter to the KNSY management is reproduced here because it might foreshadow a similar Ramius suggestion to SRDX:

We also believe Kensey Nash should address its inefficient capital structure. At the end of the last quarter, the Company had cash and cash equivalents of $32.4 million and an outstanding mortgage note of $8 million. Additionally, the Company is required to draw down the remaining $27 million from the mortgage line on or before November 25, 2007. Pro forma for the draw down, Kensey Nash will have close to $60 million of cash and $35 million of mortgage debt. In addition to the mortgage debt, we believe it would be prudent for the Company to carry a debt balance of 1.5x - 2.5x EBITDA or an incremental $60 million to $100 million. This would provide $120 million to $160 million of cash available for share repurchases or dividends to shareholders.

When Ramius’ share count reached 20%, KNSY determined that the Ramius investment constituted a change in control. Consequently, all outstanding unvested stock options, stock appreciation rights and restricted stock held by officers, employees, directors and others under the Company's equity compensation plan automatically became vested (and, in the case of options and stock appreciation rights, exercisable) in full.

On Oct 10, 2007, Ramius announced that it was seeking representation on KNSY's Board of Directors nominating Messrs. Anquillare, Feld and Smith for election at the 2007 annual meeting. Simultaneously, KNSY took several actions which addressed some of Ramius’ “suggestions”. These included a stock repurchase program using mortgage debt financing and re-evaluation of the endovascular business strategy with an eye towards maximizing shareholder value.... Indeed, during fiscal 2008, KNSY repurchased and retired 867,839 shares of Common Stock for a total cost of $24.4 million, or an average market price per share of $28.15, using available cash from a debt obligation. And, On May 16, 2008, KNSY sold its endovascular business.

On 10/24/2007 KNSY and Ramius filed a settlement agreement with the SEC regarding Board representation. see: http://www.sec.gov/Archives/edgar/data/1002811/000114420407056598/v091342_8-k.htm

Key features of this agreement were: 1) KNSY would support Ramius’ nominees, Jeffrey Smith and Ceasar Anquillare, for election to the Board, and Ramius would support KNSY’s nominee Robert Bobb, 2) Jeffrey Smith would be a member of the Governance and Nominating Committee, as well as, a new strategic planning committee, Caesar Anquillare would be a member of the Audit committee, 3) Ramius would adhere to a one year standstill agreement with respect to acquiring more shares or initiating stockholder actions, and 4) Ramius and KNSY would enter a Confidentiality agreement preventing Ramius from sharing confidential company information.

On June 20, 2008 Ramius established a Sales Plan Agreement with Cantor Fitzgerald to permit the orderly disposition of a portion of its holding in KNSY. It began selling its shares shortly thereafter at a rate approximating 10% of the daily share volume. I presume that the sale was precipitated by the the “great recession”. Almost every hedge fund was desperately seeking liquidity during the summer and autumn of 2008. By the end of 2008 Ramius had sold 75% of its position and its holdings fell below the 5% threshold. KNSY’s operating results continued to improve.

Jeffrey Smith and Ceasar Anquillare resigned from the KNSY Board on Feb 3, 2009 and Mar 12, 2009, respectively.

In summary, Kensey Nash’s (KNSY’s) response to Ramius’ interests contrasts somewhat to that of Datascope in that instead of engaging in a proxy fight, KNSY chose to negotiate with Ramius regarding Board representation. Like Datascope, Kensey Nash prospered during the time of Ramius’ involvement. I did not see any evidence that Ramius abused its insider position in the SEC documents of either company. When Ramius decided to sell its holdings, it did so in an orderly manner that did not unduely depress the stock price.