Is Settling With an Activist Investor Supposed to Be Bad for Shareholders?

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Depomed Inc. (NASDAQ: DEPO) has settled with Starboard Value in a move that will bring this activist investor fight to a close. At least for now. What is amazing, although something that has not been out of the norm, is that Depomed shares were lower on the news.

Depomed has agreed to standstill restrictions until March of 2017 as the beginning of a new nomination period. The settlement should remove the uncertainty of a proxy fight, but no formal buyout or sale process has been disclosed. despite reported buyout interest. Regardless of what details come out, the end of this activist fight, even if perhaps not permanent, should remove Depomed’s non-operational expenses and should end a management distraction so it can execute its business plan.

When news broke of the settlement, shares were up in the after-hours session on Monday. The stock opened at $24.27 on Tuesday, almost 2% higher than the $23.83 close. But after an hour of trading, Depomed shares were down 0.8% at $23.64 on Tuesday. Depomed has a 52-week trading range of $12.25 to $27.02 and a consensus analyst price target of $25.83.

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So far not much research has been published. 24/7 Wall St. did get a report from Janney’s Ken Trbovich, who reiterated Janney’s Buy rating and has a $31 price target. Trbovich noted that this settlement adds three new board members with significant public company executive management, financial accounting and M&A expertise. He said in his report:

We cannot foresee a scenario in which Starboard would accept restrictions on its ownership without having gained comfort with DepoMed’s operational outlook in the near term. Thus, we see an agreement to such restrictions for 9.8% holder, in front of what are normally DepoMed’s two strongest quarters, as a vote of confidence in the outlook for the both the business and the stock.

The parties agreed to settlement with DepoMed accepting three of Starboard’s board nominees who will join its existing six member board as independent directors. At the same time, DepoMed moved the window to make nominations of directors and other shareholder proposals to a period that is shortly after when we would expect DepoMed to report full year 2016 results. This would appear to give Starboard the option to nominate additional directors, or to bring other shareholder proposals, or both, between March 15, 2017 and April 15, 2017.

Jim Schoeneck, president and CEO of Depomed, said of the settlement:

We are pleased to have reached this agreement with Starboard, which we believe is in the best interests of our shareholders. We are confident that we are aligned to deliver significant value to our shareholders.

Jeffrey C. Smith, chief executive officer and chief investment officer of Starboard Value, said of the settlement:

We are pleased to have reached an agreement to work with Depomed.  We believe the addition of these three highly qualified directors will add to the experience in the boardroom and expect that the board and management team will focus on delivering significant value for shareholders.