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Volcano Corporation (VOLC): Engaged Capital Goes Activist and Asks for Changes on the Board

Glenn G. Welling‘s Engaged Capital is bullish on Volcano Corporation (NASDAQ:VOLC) and has recently upped its position in the company. The fund disclosed holding almost 2.64 million shares, up from 2.02 million the fund disclosed in its latest 13F filling. Following the increase, Engaged Capital’s stake amasses 5.1% of Volcano and the fund went activist on the medical equipment company and sent a letter to its board of directors. In the letter, the investor outlined its position regarding Volcano’s underperformance and accused the board and the management team of damaging the company’s value and urged for changes on the top levels.

Volcano Corporation (NASDAQ:VOLC)

Mr. Welling said in the letter that the management of the company has missed on several opportunities to maximize the shareholder value of the company, including a possibility to sell Volcano Corporation (NASDAQ:VOLC) at an attractive price, significantly above the current market price of the stock. The letter stated that Volcano’s stock has outperformed on many levels in comparison with indices and its peer group. For example, only during the last year, the company’s stock lost 54%, while its proxy peer group gained 8% and the S&P 1500 Health Care Equipment Index advanced by 23%.

One of the main reasons for the company’s more than weak performance is the failure of the management team to provide appropriate growth expectations over the last years. At its 2011 Investor Day, the management of Volcano Corporation (NASDAQ:VOLC) provided its revenue forecasts for the following three years, failing later to achieve the targets. Moreover, for the current year, the forecast has been reduced by a huge margin – by 33% versus its 2011 target, or to $399 million.

Among other issues, Engaged Capital also mentioned the fact that Volcano Corporation (NASDAQ:VOLC)’s Selling, General & Administrative expenses have been growing at a higher rate than the revenue, while the company’s executives have been paid big salaries, despite a poor performance and consistent failure to properly forecast the company’s performance.

Engaged Capital has a point. The stock of the company dropped by 53% since the beginning of the year, and currently trades at around $11.08, which is close to its 52-week low of $10.70. Volcano Corporation (NASDAQ:VOLC) has been consistently missing the estimates for revenue and earnings and turned to a loss last year, reporting EPS of -$0.31, lower than the estimates of -$0.27.

The company acquired AtheroMed, Inc. earlier this year, which expanded the company’s portfolio with the addition of Phoenix® Atherectomy System used in the treatment of peripheral artery disease (PAD). While Volcano Corporation (NASDAQ:VOLC) said in a statement that the global atherectomy market is evaluated at around $350-$400 million and gaining arount 7% each year, Engaged considers that since the company has failed to evaluate its future performance in the past, there is a big chance that this acquisition might prove deffective now, as well. In addition, the investor said that at the beginning of the year the company’s management said that it does not plan to do any big acquisitions, while for AtheroMed it paid $115 million.

In this way, Engaged considers that the right way for the board to proceed is to appoint representatives from the shareholders to Volcano Corporation (NASDAQ:VOLC)’s board, who will be capable of acting in the best interest of shareholders and maximize the value of the company.

The full letter can be read here:

Engaged Capital’s Letter to Volcano Corporation

Aside from Engaged, other funds among those tracked by Insider Monkey, also bet on Volcano Corporation (NASDAQ:VOLC) turning around. Stephen Dubois‘ Camber Capital Management is bullish on the company and added around 29% to its stake during the second quarter to 3.15 million shares, followed by Justin John Ferayorni‘s Tamarack Capital Management with 2.02 million shares, up by 23% on the quarter.

Disclosure: none

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