October 1, 2013
Discovery Group Holding Company is a very successful small-cap focused fund and effective activist investor with over 46 13D’s filed at the time of the Given Imaging investment. Discovery also has a reputation of aggressively pushing its targets toward an acquisition, with 57% of its 46 targets acquired. As seen in the Activist Breakdown section, its average returns smash the S&P 500 over the same respective time periods by nearly every metric shown. At the time, this was the largest activist investment ever made by Discovery Group. Other activists have fared well with Healthcare sector investments, with an average return of more than 50% than S&P 500 and over 41% of the targets have been acquired (typically at a healthy premium). The Healthcare Equipment industry has outperformed as well and posts a similar % of acquisitions.
Discovery lays out a very convincing case in its letter to shareholders here.
A closer look at Given Imaging:
- Clean balance sheet with no debt
- Cash accounts for ~20% of its market cap
- Solid margin profile with profitable earnings and free cash flow
- EPS growth is extreme, revenue growth is low albeit it still growing
- Valuation appears in line with historical metrics
Given the strong balance sheet, margins, profitable operations and cash flow protecting the downside and Discovery’s proclivity for pushing targets toward an acquisition, The Alternative Activist had high conviction in the investment.
The Outcome: Feeling the pressure from Discovery Group to pursue a sale of the company, Given Imaging initiated a process and was acquired by Covidien 2 months later for a 56% gain.