Orthofix: Shots Fired Across the Bows

In the ongoing battle between Orthofix (OFIX) and its dissident shareholder, Ramius LLC, to seat four new dissident directors to the board, both companies fired shots across each other’s bows in an attempt to further their respective positions. On January 28, 2009, OFIX sent a letter to Ramius protesting the nomination of Peter A. Feld in which it notes that Mr. Feld is neither a partner nor a senior executive listed on Ramius’s website. Additionally, the letter notes that he is only 29 years of age and has little business or healthcare experience and that his “tenure on the boards of public companies is not only limited, but has on more than one occasion coincided with or been followed by significant adverse events for those companies”. Orthofix noted Mr. Feld’s participation on the boards of CPI Corp., a portrait studio company and Sharper Image, which filed for bankruptcy protection shortly after Mr. Feld left its board.

The most surprising turn of events in our opinion was the Schedule 14A filing made by Ramius on January 22, 2009 in which it said that it would not try to unseat Alan Milinazzo, Orthofix’s CEO, as it had previously sought to do. It seems to us that the whole exercise of changing the management and recovery strategy being pursued by Ramius becomes irrelevant and point less if the “alleged” architect of the problem remains on the board of directors. In response to OFIX’s January 28, 2009 letter, Ramius announced that it had received written requests from the holders of approximately 55% of the Company’s common stock to call a Special General Meeting of Shareholders. With the threshold at only 10% and with Ramius holding 5.3% of the shares, we had predicted in our post of January 13, 2009 that this would likely be the case.

Not to dredge up old dirt…but, in addition to Mr. Feld’s inexperience, shareholders should carefully consider the other dissident board members that Ramius is proposing be placed on OFIX’s board, particularly Steven J. Lee. Mr. Lee was was the Founder, President, Chief Executive Officer and Chairman of PolyMedica Corporation (PLMD), a leading provider of diabetes care, from 1990 until August 2002, the time of his abrupt retirement from PolyMedica. At the time of his retirement, PolyMedica was involved in a Federal investigation alleging Medicare fraud and a related scheme to inflate the company’s revenues and earnings.

The federal government began investigating PolyMedica in August 2001, when dozens of FBI agents, including 19 computer specialists, raided four offices in Florida of two PolyMedica subsidiaries, Liberty Medical Supply and Liberty Home Pharmacy, and the homes of two employees. At the time, former employees said the company shipped diabetes test strips to people who didn’t order them and did not reimburse Medicare for returned packages. Mr. Lee was Treasurer of Liberty Medical Supply during part of this time.

In November of 2004 PolyMedica reached a settlement with the Federal government in which it agreed to pay a lump-sum payment of $35 million over alleged Medicare fraud but would not admit any wrong doing. A shareholder lawsuit alleging stock price manipulation based on inflated revenues and earnings was settled for $5.5 million in October of 2007.

While shareholders representing 55% of the shares outstanding have opted for a special meeting, its important to keep in mind that 5.3% of those shares are represented by Ramius, leaving slightly less than a majority, in effect, requesting a vote. Management directly controls 7.3% of the shares outstanding, with a former Chairman of the Board, Robert Gaines Cooper controlling an additional 5.3% of the shares, all safely on management’s side. Although it might be tempting on the part of shareholders to give the board a good shake, dissident board members, if elected, would still be in the minority with current management still at the helm. While we have been critical of management in the past and remain cautious about Orthofix’s recovery, we do not believe that the proposed change in directors by Ramius will net the company any benefit.

Disclosure: I have no investment in Orthofix.