Developing World Healthcare Blog

The Public/Private Disconnect Goes Global: Part 1

Background

Managing a public company is a balancing act between generating adequate returns and growth to satisfy investors and re-investing in the business to sustain returns and growth. The public markets consist of a wide range of investors ranging from those with long-term orientations to those who buy and sell positions faster than they can read this blog post. In addition, there are the activists and the indexers. The broad diversity of opinions and demands can be very difficult to tolerate. That said, the alternatives have their drawbacks. Private equity and venture capital investors also are very demanding, and working for the government isn’t that much fun.

Case Study: WuXi PharmaTech

This background brings us to the subject at hand: WuXi PharmaTech. The company is China’s leading contract research organization (CRO) serving the life sciences industry. WuXi went public on the NYSE in 2007 and went private in a $3.3 billion transaction this past December. We got to know the company five years ago as a sell-side analyst while working in Singapore. We posted about the company in April 2015. There was (and is) much to like here: a blue chip client list; a management team with prior US experience; very favorable reference checks; and structural advantages resulting from its location in China.

Public/Private Tension: Speculative Bets Can Pay Off

The public/private conflicts were very real in WuXi’s case. We met a senior executive of one of WuXi’s leading customers after moving back from Singapore. He spoke highly of the company and management team, and mentioned the ongoing tension with their public shareholders over investment versus profits. He then proceeded to tell the story of how the two companies were in discussions about expanding their relationship which involved building a new lab. At one point during the negotiations, WuXi’s management took him to visit a potential site. A brand new lab already was there. “Here’s your new lab,” said his hosts.  His company took the space.

Engaged, Dissed, and Left at the Altar

Second, in 2010 Charles River Laboratories (CRL) agreed to acquire WuXi for $1.6 billion in cash and stock. The deal was controversial with significant shareholder opposition, and Jana Partners launched a successful campaign to stop it. The criticisms focused on the deal’s valuation (16x EBITDA); CRL’s poor track record with acquisitions; lack of confidence in projected synergies; and integration risks. Those arguments were reasonable. There was an argument that WuXi’s cost and scale advantages were unsustainable, and that new businesses would not meet expectations. The concerns were valid, but ultimately addressed successfully. Management moved some operations to lower-cost locales, and successfully ramped up its new offerings. Admittedly, CRL’s management could have blown this.

When Frustrations Boil Over……………………

The point of recounting these stories is to highlight how management teams can become disenchanted with the joys of running a public company.  Yes, some managements do create their own problems. In this case, we have a well-regarded management team contending with the usual tensions compounded by the going through the experience of an aborted merger (that’s why there was a $30 million break-up fee.)     

Given this experience, it’s logical to expect that this language would appear in the Schedule 13E-3 filed in conjunction with the going private transaction:

“Dr. Li, the chairman, chief executive officer and one of the founders of the Company, first considered making a proposal to acquire the Company on or about March 5, 2015, following the market’s negative reaction to the Company’s announcement of its financial results for the fourth quarter and full year of 2014 on March 5, 2015.”

We’ll address the events of March 5 and the China angle in a few weeks in Part 2 of this post.