DOMA Perpetual Sends Letter to the Board of Directors of InMode Urging the Execution of a 40% Tender Offer
Believes
Asserts the Current Valuation Offers an Unprecedented Opportunity to Create Shareholder Return
The letter can be downloaded here.
The full text of the letter follows:
To the Board Members of
Over the last few months, we have communicated privately with the Board of Directors of the Company (the "Board") about our concerns regarding the Company's capital allocation strategy and to urge the Company to prioritize finding new ways to make the equipment acquisition process more efficient for its clients. During this period,
Early this year, we brought to the Board's attention the misguided and financially-uninformed comments of
The Board has spent significant time looking for companies to acquire, yet we believe it has failed to consummate any attractive acquisitions due to valuationsvi. In the current market, where valuations are stretched, the task of finding a quality company with valuable intellectual property at a reasonable purchase price is exceedingly challenging. By contrast,
In order to create proper and material shareholder return,
The Company's shareholders have been made to endure subpar performance for too long. We believe the Board is destroying value with an inefficient and ineffective capital allocation strategy. There is ample, unused flexibility to generate shareholder return. Keeping roughly
The tender offer we are suggesting will only use about
It is clear that a potential acquisition in neuromodulators or fillers is the right long-term move for the Company to diversify its intellectual property, but there are many years ahead before
The current slowdown in equipment leasing is due to macro factors and it will likely dissipate in coming quarters, as central banks around the globe continue to lower rates. In the US, the market is predicting multiple rate cuts this yearvii. As such, the opportunity to buy back 40% of the Company could disappear. In our view,
The strategies laid out below represent a sensible and thoughtful capital allocation program for
-
Continue to invest organically in R&D. To avoid the same fates experienced by medical laser companies when their patents expired,
InMode should focus on constant innovation and developing new intellectual property internally. The belief that intellectual property diversification can be acquired from M&A opportunities could prove wrong. To control its own destiny,InMode should expand its R&D and focus on innovation, pushing more boundaries. At this moment, we viewInMode's R&D productivity as unparalleled and believe that the Company must continue investing in the development of internal intellectual property. We believe this should be the tentpole of the capital allocation strategy, especially when there are no great companies at rational prices to acquire. -
Buy or invest in new and promising developing technologies in the sector. This is a venture capital-like strategy of capital allocation, in which the Company invests small sums into promising start-ups in their early stages. This is a smaller but crucial component of capital allocation strategy.
-
Approach large M&A deals with even more patience. In future M&A,
InMode must take its time. We sense the Company is rushing to find something at a moment when valuations are very high and there are no clear candidates with margins comparable toInMode's or large contributors to earnings growth.InMode should take a multi-year approach to this process and, when ready, should use its debt capacity for future acquisitions.
In recent remarks,Mr. Mizrahy andInMode's CFO,Yair Malca , stated they have yet to find any businesses with margins similar toInMode's and are looking at an acquisition target that should be accretive to EPS after twelve monthsviii. Setting the bar this low is a huge mistake. Every company produces the same thing: cash. FromMr. Malca's statements, it sounds like theInMode's management and the Board are proposing spending hundreds of millions of dollars to buy a business that would need to cut executives and salespeople to be able to even approach breakeven EPS after a yearix. What is the return of invested capital of this deal? What is the cash production and the predictability that competitors will not enter the market or choose to outspend you in marketing? In neuromodulators and fillers, there are several players with new products coming to market; the business is not a monopoly. Compare the results on EPS and ROE of executing this M&A deal versus the execution of a 40% tender offer forInMode's stock.
M&A should be part of the Company's capital allocation strategy, but always in competition with other alternatives at hand. We believe that the opportunity cost of such an M&A transaction would be way too high, especially when compared to using capital for a large tender offer whenInMode's valuation at an all-time lowx.
Choosing to spend hundreds of millions of dollars to close what sounds to us like an unfavorable, unprofitable M&A deal instead of executing a large, opportunistic tender would make it obvious to shareholders that board-level change is needed. -
Rethink dividends. Companies with low returns on equity – including those with no competitive advantage, selling an undifferentiated product and suffering from the competitive dynamics of capitalism – should return all free cash flow to shareholders in the form of dividends. Reinvesting in a business with low or no returns does not serve the interest of shareholders. In contrast, companies with high returns of equity and the potential to enjoy high returns of capital invested should show a low dividend or no dividend at all. When a dividend is issued, the company imposes tax on its shareholders. If the nature of the shareholder is short term and they are looking for cash from their investment, they can always sell their shares and cash out.
InMode's returns of capital and equity are so high and its patents are so far from expiring that there is no reason for the Company to pay dividends at the present time, nor in the coming years. The business is growing, and we understand thatInMode has a strong potential to develop new intellectual property and the opportunity to acquire great complementary businesses in the future. We believe that paying a dividend, a strategy the Company appears to prefer over issuing large buybacksxi, is a huge mistake. Certainly, if patents were near expiration, and if the Company has failed to diversify its intellectual property, then there may arise a moment when a large dividend could be appropriate use of capital. This is not that time. If Board members are interested in obtaining cash, they are free to sell some of their own stock at the tender offer. Of course, one could argue it does not make a lot of sense to sell stock whenInMode's valuation is so low. -
Strategically execute tender offers and buybacks. We believe that any tender offer or buybacks should only be executed at a value-accretive price. This occurs when the price paid for the stock is low enough that the value generated, when compared with using that same cash for M&A or internal growth, is still a superior return. At this moment in time, we would challenge the Board to find an M&A opportunity with higher returns of capital, equity and assets, higher margins with less competition, better intellectual property and superior free cash flow growth characteristics than
InMode possesses – and do so at a lower valuation thanInMode . Outstanding businesses at attractive prices are very scarce. There are many years beforeInMode's patents expire but the opportunity to buy 40% of the Company with a tender offer of stock at this depressed valuation might not last. We believe thatInMode will still have plenty of cash in the future for M&A activities and about half a billion in current untapped debt capacity for an opportunistic M&A deal.
It appears the Board thinks it has done enough by issuing a small buyback in relationship to the cash at hand, debt capacity and free cash flow of the firm. We believe the Board is mistaken. It is our view that
Sincerely,
Pedro Escudero
CEO & CIO
i InMode Q1 2024 Earnings Call
ii InMode Q1 2024 Earnings Call
iii InMode Q3 2023 Earnings Call
iv InMode Q1 2024 Earnings Release, DOMA Perpetual Internal Calculations
v InMode Q1 2024 Earnings Release & Call
vi InMode 23rd Annual Needham Virtual Healthcare Conference Presentation 04.09.2024,
vii
viii InMode 23rd Annual Needham Virtual Healthcare Conference Presentation 04.09.2024, InMode BNPP Exane 2nd Annual Aesthetics Day
ix InMode BNPP Exane 2nd Annual Aesthetics Day 05.21.2024,
x DOMA Internal Calculations, Bloomberg Database
xi InMode 23rd Annual Needham Virtual Healthcare Conference Presentation
View original content to download multimedia:https://www.prnewswire.com/news-releases/doma-perpetual-sends-letter-to-the-board-of-directors-of-inmode-urging-the-execution-of-a-40-tender-offer-302206114.html
SOURCE DOMA Perpetual