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It is unclear whether California-based Masimo Corp.’s annual meeting next month will resolve any of the issues that have bedeviled its relationship with Politan Asset Management, one of its largest shareowners. The rancor between the two has become increasingly boisterous and now seems ready to burst into a full-blown proxy battle. No doubt, the repercussions of the looming battle will be felt literally beyond the boardroom walls in Irvine. 

Proxy wars are rare, in part because no-one likes the enmity they inevitably engender. Aside from creating factions among normally cordial directors, the bad blood they foster is often enduring long beyond the shareowner voting.

Walt Disney Co., for instance, has had two run-ins with Trian Partners, its shareowner nemesis. After reaching a détente in early 2023, the battle resumed in late November with Trian citing a $70 billion loss of shareowner value since the prior truce. Its second proxy battle, launched in January, sought to place two of its directors on Disney’s board. In the end, the company’s shareowners rejected that effort, and Trian dumped nearly 30 million shares onto the market at around $120 per share. By mid-June, the shares had slunk to around $102.

Pulse Oximetry Technology

So, the stakes are hardly trivial for Masimo’s shareholders. Nor is it inconsequential to the individuals who benefit from its products. Founded in 1989, the company is best known for its pulse oximetry technology that measures the body's oxygen saturation levels. In 1995, its Signal Extraction Technology (SET) revolutionized pulse oximetry and is the primary pulse oximeter used in 9 of the top 10 hospitals listed in the 2022-23 U.S. News & World Report Best Hospitals Honor Roll. 

That technology pushed company revenue to $1.2 billion in 2021 and its market capitalization to $15.5 billion by the end of 2021. It was then that supply chain disruptions started to affect financial results. Joe Kiani, Masimo’s Chair and CEO, warned investors in a March 30, 2022 Form 8-K, that despite strong customer demand and having successfully weather the Covid-19 turmoil, interruptions to its supply chain had affected the company’s first quarter results. 

By year’s end, revenues had recovered to top $2.0 billion, largely due to its merger with Sound United. On the other hand, the higher costs related to the supply chain caused its gross margin to tumble to 52.0% from 65.2%. 

Proposed Spin-Off

That gave activist investors, Politan Capital Management, an opportunity to push for the spin-off of the company’s consumer products businesses, which accounted for 37.7% of 2023 revenues and 25.7% of gross profit. Under its proposal, Mr. Kiani would continue as CEO of the consumer spin-off, and serve as a senior adviser to Masimo’s remaining professional-focused firm. 

The deal looked like a win for the fund, which controlled 40% of Masimo’s board seats despite owning less than 9% of the shares. The board initially welcomed the proposal, according to the 2024 proxy. 

But within a month the mood had reversed. Mr. Kiani saw a new term sheet presented by Polian’s Quentin Koffey as leaving the consumer products spin-off financially vulnerable and unviable. At around the same time, an undisclosed party stepped forward with a potential takeover for the consumer products piece that found favor with the board majority.

Looming Proxy Fight

The reversal of board support triggered the proxy battle. Mr. Koffey, who took a board seat in 2023 with former Johnson & Johnson staffer Michelle Brennan, demanded two additional Masimo seats, including one that would replace the company founder. Politan would later reject three compromise offers to put just one of its nominees on the board, and ultimately opted to launch the proxy battle while criticizing the current board as too connected to Mr. Kiani. 

The criticism comes despite governance changes made by the company in the past year. Among the changes, just one of the five board members, Mr. Kiani, is directly affiliated with the company. Its audit, nominations, and compensation committees are all chaired by and composed entirely of independent directors. Its shares all have just one vote, and the company is phasing out its classified board in favor of all board members serving terms of the same length. It is also planning to expand the size of the board. 

The brewing bad blood between the sides was no doubt expected once the terms of the deal were changed to the detriment of the consumer spin-off. But while the boardroom battle is over money and control, its effects beyond the boardroom walls will have decidedly personal repercussions. 

A fractious board will harm the company’s ability to set and implement a definitive strategy, hurting investors, most of whom rely upon companies like Masimo to perform to help them retire. More concerning, though, is that the turmoil could undermine the company’s ability to supply and create life-saving products for real patients. 

James C. Allen is an entrepreneur and owner of Delahaye Advisers LLC, a financial consultancy based in Charlottesville, Virginia.  

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