Smith & Nephew, a British medical technology company, has made a name for itself in the global market by developing, manufacturing, and selling a wide range of medical devices and services. With segments like Orthopedics, Sports Medicine, and Ear, Nose and Throat, as well as Advanced Wound Management, the company has established itself as a leader in the industry. However, despite its strong market position and brand perception, Smith & Nephew has been facing challenges that have led to a decline in shareholder value.
Identifying the Issues
One of the primary issues plaguing Smith & Nephew is the decline in operating margins in its Orthopedics segment. From 23% in 2019 to 11% in the present day, this significant drop has been attributed to issues related to supply chain management, logistics, and manufacturing. The complexity of the Ortho business, requiring the timely delivery of a variety of implants and tools for each procedure, has resulted in back orders and operational inefficiencies. Additionally, the company has witnessed a high turnover in its management team over the past few years, further impacting its ability to implement long-term operational strategies.
The Role of Activist Investor
Recognizing the need for intervention, Cevian Capital, a prominent activist investor with a track record of enhancing value in European companies, acquired a 5.11% stake in Smith & Nephew. Cevian’s strategy as a “constructive activist” involves working closely with companies to improve their operational performance and long-term value. With a focus on operational improvements and a long-term mindset, Cevian is well-positioned to assist Smith & Nephew in addressing its challenges and revitalizing its business.
Smith & Nephew’s management has outlined a 12-point plan to address the issues facing the company, with a particular emphasis on fixing the Orthopedics segment to regain momentum and market share. While this plan holds promise, continued management turnover poses a significant obstacle to its successful implementation. Cevian’s long-term approach to activism and expertise in operational performance make it a suitable partner for Smith & Nephew in executing the revival plan.
By leveraging Cevian’s experience and taking a proactive approach to operational improvements, Smith & Nephew can aim to restore the operating margins of its Ortho division to pre-pandemic levels or even surpass them. With Cevian likely to secure a board seat in the company, effective collaboration at the leadership level is crucial for driving sustainable change and value creation. The combination of Smith & Nephew’s market position and Cevian’s operational focus sets the stage for a successful revival of the company’s fortunes in the coming years.
Smith & Nephew stands at a critical juncture in its journey, with the support of Cevian Capital offering a ray of hope for a turnaround. By addressing key issues, enhancing operational efficiency, and fostering a long-term mindset, the company can pave the way for sustained growth and value creation in the highly competitive medical technology sector.