Can ConMed’s Founding Family Survive? PART I

The Corasanti Family runs Utica, New York-based ConMed, Inc., one of the largest ($1.3 billion market capitalization) diversified orthopedic companies in the world. Eugene Corasanti founded ConMed when he has 39-years-old after years of serving as an independent public accountant in the small city of Utica, New York. He is 83-years-old now and to this day, one of the hallmarks ConMed is its accounting culture.

Four members of ConMed’s seven member board of directors are accounting professionals—Eugene Corasanti (CPA), Bruce Daniels (former Controller of Chicago Pneumatic Tool), Jo Ann Golden (CPA and former managing partner of Dermody, Burke and Brown) and Mark Tryniski (former Chief Financial Officer of Community Bank and partner with Price Waterhouse).

One of the other hallmarks of ConMed is an insular corporate culture. And it is on this petard that a group of dissident shareholders are trying to hoist the Corasanti family.

Lending voice to ConMed’s dissident shareholders is Voce Capital (Italian for “voice”) and its managing partner J. Daniel Plants.

Voce is petitioning ConMed’s shareholders to wrest control of their company away from the Corasanti family.

The Coming Battle for Control of ConMed

That ConMed is undervalued is not disputed. By the cumulative measure of P/E ratio, Price-to-Sales ratio and a comparison of P/E to expected earnings growth rate, ConMed is cheaper than 83% of all other orthopedic companies (see our Power Rankings).

Clearly San Francisco-based Voce Capital sees much more value in ConMed than its Wall Street brethren. But Voce Capital is claiming that ConMed’s management and, more specifically, the Corasanti family, is blocking the company from realizing its true (and higher) value.

Said Voce’s managing partner J. Daniel Plants in a letter he wrote to ConMed this past November 2013, “ConMed suffers from a culture of nepotism, patronage and dystopian corporate governance that would be corrosive in a closely-held corporation but which is utterly corrupting in a public company.”

Since Voce Capital surfaced, two other well-known corporate raiders Camber Capital (5.1% owners of ConMed shares) and Coppersmith (5.9% of ConMed shares) have also begun buying shares. Combined the three firms own nearly 12% of ConMed’s shares—which is 4x the number the Corasantis own.

From all appearances, a bruising fight is shaping up for this coming May’s annual shareholder meeting.

Can the Corasantis survive?

Family and Friends

One of Voce’s most pointed criticisms concerns ConMed’s insular and family dominated corporate culture.

At ConMed many members of the Corasanti family have senior employment positions. When Eugene Corasanti, ConMed’s founder, stepped down as CEO in 2006, his son Joseph J. Corasanti, Esq. became his father’s successor. Eugene Corasanti’s other son, David Corasanti, also works at ConMed. ConMed’s head of corporate and business development activities is 82-year-old William W. Abraham whose two sons-in-law are also employed by the Company.

Joseph Corasanti’s sister-in-law Heather L. Cohen is a member of ConMed’s senior management team and serves as Executive Vice President, Human Resources, Deputy General Counsel and Secretary. In this role, she’s involved in managing the personnel dynamics and conflicts of interest at ConMed, including those between the Corasantis (her family) and the company.

In its public filings with the SEC, ConMed has disclosed that, addition to salaries and equity participation programs, ConMed’s top executives also receive country club memberships, automobile leases and special insurance policies. ConMed made payments to other Corasantis including E. Corasanti’s brother-in-law; to J. Corasanti’s father-in-law and brother-in-law; and to the law firm of a former director, Robert E. Remmell, throughout his tenure on the board. Most recently, J. Corasanti used ConMed assets to promote the book of his wife, Michelle Cohen Corasanti, including the use of his staff’s time, corporate letterhead and company email accounts.

Said Voce Capital’s Plants:

“Shareholders wonder where the line is drawn between the assets of ConMed and the interests of the Corasanti family, or if there’s a line at all.”

The elder Corasanti, now 83-years-old, continues as both Chairman and Vice-Chairman of the board. As Chairman he receives an annual board retainer. As Vice-Chairman he has an employment agreement with ConMed and receives a $100, 000 annual salary and equity compensation which in 2012 totaled almost $150, 000. His job is to make himself “available to advise the Chief Executive Officer” (i.e., his son).

Said Voce’s Plants:

“Isn’t that what all directors are supposed to do as part of their job? But it doesn’t stop there. Eugene Corasanti is collecting $3.7 million of deferred compensation as if he had retired in 2006, even though as a current employee of the Company he’s not retired and otherwise would not be entitled to receive it at this time. He also continues to enjoy “an automobile allowance, club memberships and life and health insurance benefits.” These benefits continue “during E. Corasanti’s life and the life of his wife. Mrs. Corasanti’s specific contributions to ConMed’s success are unclear to us.”

“Like his father, J. Corasanti has a pretty nice gig. His annual compensation is approximately $2.5 million. Just like dad, he earns additional payments for his Board service—despite the fact that he’s also an employee. This is both inappropriate and unnecessary, given how handsomely he’s already paid as CEO. The Company continues to carry as a loan to father and son premiums paid by ConMed to purchase multi-million “split-dollar” life insurance policies for their benefit. In addition to the other perquisites lavished on top ConMed executives, J. Corasanti also has access to special life and health insurance policies and benefits for himself and his wife should she outlive him (coincidentally, just like her mother-in-law). And finally, he’s protected by a generous ($15 million) golden parachute. The apple, they say, never falls far from the tree.”

So What?

The Corasanti family hires its relatives and pay themselves well. So what?

Nepotism is not, a priori, a bad thing. Two firms which the managers at Voce are no doubt familiar with—Piper, Jaffray and Hopwood and Stephens Inc.—are famous for their family hiring. Within the financial community both firms enjoy exceptional reputations.

Voce Capital, however, maintains that ConMed’s familial and insular hiring patterns are directly linked to ConMed’s poor performance.

Said Voce in a November, 2013 letter to ConMed’s management:

“In the last ten years, ConMed’s organic growth has slowed considerably, from high single digits early in the prior decade to essentially flat to down this decade. These results significantly underperform orthopedic industry leaders such as Smith & Nephew, Stryker and Zimmer. Zooming in on 2013, ConMed is the only one of its peers to report negative revenue growth.”

Furthermore, alleges Voce:

“Throughout 2009 ConMed declared the worst [of the 2008 recession] was behind it, yet went on to fall short of its revenue guidance for FY 2009. In February 2010 it confidently announced ‘the economic effects on the company had reached a welcome turning point’ and in July went on to say ‘our business is stabilizing and returning to a state of steady consistent growth.’ Yet ConMed missed both its 3Q10 and 4Q10 revenue targets (4Q10 actually shrank 3.5% year-over-year). As a result, ConMed subsequently fell short of its full year 2010 revenue guidance, then missed it again in 2011…and yet again in 2012. While 2013 is not formally over, it’s not too early to write its epitaph because management has already lowered its full year revenue target below the bottom end of its original forecast—making six straight years ConMed has missed its revenue projections.”

Annual Meeting in May

Voce Capital has proposed four independent directors to replace some of the existing directors on ConMed’s board of directors. The annual meeting is set for May 22 in Utica, New York.

The owners of ConMed—its shareholders—will have an opportunity to vote at that meeting. Since Voce launched its challenge to ConMed’s management, the value of the shareholder equity has risen by 30.0%. Love them or hate them, investors like Voce do generally have the effect of pushing equity prices up.

Next week:  One of the dissenting shareholders throws in the towel and ConMed adds two outside members to its board of directors.