In this article, I will talk about why Obagi Medical Products (NASDAQ:OMPI) (pps: $12.03, market cap: $226.20M) is still an acquisition target, and why it will still be acquired soon.
Various news outlets have erroneously reported that the company said "it was not pursuing a deal," based on an answer given to a question in the company's earnings call. The question that was asked was-- "did you hire a financial adviser to help pursue a deal?," to which the company replied, "no."
This is technically correct--while the company did not hire a financial adviser, it certainly did appoint one to its board. On Thursday, Aug 2, 2012, Obagi announced the appointment of Kristina M. Leslie to its Board of Directors. Ms. Leslie was also appointed to the Company's Audit Committee.
Ms. Leslie holds a BA degree in economics from Bucknell University and an MBA from Columbia University. From 2004 to 2007, Ms. Leslie served as Chief Financial Officer of DreamWorks Animation SKG, Inc. (NASDAQ:DWA), a company that develops and produces computer generated animated feature films. Prior to DreamWorks Animation SKG, Ms. Leslie served as the Chief Financial Officer of DreamWorks LLC, a diversified entertainment company, from 2003 to 2004, and as Head of Corporate Finance and Strategic Planning from 1996 to 2003. While at DreamWorks LLC, Ms. Leslie led the initial public offering of DreamWorks Animation SKG. Ms. Leslie also served as Director of Financial Planning for Viacom Inc. (NYSE:VIA), an entertainment company, from 1993 to 1996.
Kristina M. Leslie is in effect a financial adviser. An appointment to a board of directors is not a hire, but effectively acts as the same--Dow Jones news needs to do a better job reporting in my strong opinion.
On February 10, 2012, Voce Capital sent a letter to the Obagi Board of Directors criticizing the Board's adoption of a poison pill and demanding immediate action to address the company's corporate governance failures. Voce's letter in part stated that it believed Obagi has spurned recent overtures to acquire the company, and further cites pervasive corporate governance deficiencies that explain the Board's unwillingness to consider those proposals. Voce also expresses concern over the Board's recent decision to adopt a poison pill, citing it as further evidence of the Board's entrenchment.
The poison pill was officially voted out by the shareholders on June 6th, clearing the way for a hostile bid for the company. On July 10, the company officially removed the expired pill from its corporate governance.
Why was the Obagi board so insistent on placing an active poison pill in its corporate governance? I believe we can find the answer in its latest 10Q, Exhibit 1.10, last paragraph:
DETERMINATIONS, CHANGES AND EXCEPTIONS TO PLAN
This document highlights the principal features of the Plan, but it does not describe every situation that can occur. The Company and the Administrator retain the right to interpret, revise, modify or delete the Plan at its sole discretion at any time. This document supersedes any previous incentive plan document including any specific provisions stated in the Plan Participant's offer letter or employment agreement specifying eligibility, amount, and participation in any incentive or bonus program unless otherwise explicitly set forth in the offer letter or employment agreement.
The Company reserves the right to make any reasonable adjustments to the Plan as necessary to reflect business and economic conditions. The CEO and/or the Compensation Committee, as applicable, must approve any exceptions, modifications or adjustments to the Plan. The Company further retains full and final discretion to determine whether a Plan Participant has earned any incentives pursuant to the Plan and to adjust upward or downward any award that a Participant may be eligible for.
The Compensation Committee shall have the full and final discretion to adjust in good faith the Company Performance Objectives and/or achieved financial results to reflect the occurrence of extraordinary events during the Plan period, including merger and acquisition transactions and other corporate events not contemplated at the beginning of the Plan period or when the Company's operating budget for the current Plan year was approved. All such determinations or adjustments shall be final and binding on all persons.
The recent 10Q is the first one where Obagi actually places a compensation/incentive plan into force and effect. If the company was taken out in a hostile bid before the above was in place, the Board of Directors and management would have received next to nothing. As it currently stands, institutions own about 90% of the company stock, with insiders owning less than 1%. These institutions effectively control the destiny of Obagi, not management, and the majority of them want Obagi sold.
Anonymous sources tell me Avon Products Inc. (AVP) was the first company to have had serious talks for acquiring Obagi, but has not bid high enough for the company--so far.
The other potential suitors
- Valeant (VRX) develops, manufactures, and markets pharmaceutical products in the areas of neurology, dermatology, and branded generics.
- Medicis (MRX) engages in the development and marketing of various products for the treatment of dermatological and aesthetic conditions in the United States and Canada.
- Allergan (AGN) is a multi-specialty healthcare company primarily in the United States, Europe, Latin America, and the Asia Pacific. The company discovers, develops, and commercializes specialty pharmaceutical, biologics, medical device, and over-the-counter products for the ophthalmic, neurological, medical aesthetics, medical dermatological, breast aesthetics, obesity intervention, urological, and other specialty markets worldwide.
- My anonymous sources now tell me L'Oreal (OTCPK:LRLCY) has stepped up to show serious interest in the company. L'Oreal offers various consumer products, such as skin care, make-up, hair color, hair care, and styling products under the L'Oréal Paris, Le Club des Créateurs, Garnier, Maybelline New York, Softsheen Carson, and Essie brand names. L'Oreal has been mentioned as one possible suitor for Obagi as well.
These same sources also inform me that a private equity firm might be interested in acquiring the company, and that an investment banker has been brought in.
On July 3rd, 2012, Obagi filed a confidential treatment order (CT) with the SEC. It is common place for a company to ask for a CT order when hiring an investment banker. Under SEC law, a company can deny it has hired one, as a CT ORDER effectively protects that a certain fact even exists.
There is no question I got the exact timing wrong on when the acquisition would take place--these things are very hard to predict, even with accurate back chatter, because only an insider would know for sure what exactly is going on.
I have made a supplemental video for this Seeking Alpha article on YouTube for those who are interested in some further commentary on this matter. Always do your own due diligence before buying and selling any stock. It is never a good idea to do things on a 'knee-jerk reaction.'
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Family members hold Obagi stock.
Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.