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CASE 5
GENZYME AND RELATIONAL INVESTORS:
SCIENCE AND BUSINESS COLLIDE?
Synopsis
By April 2009, Henri Termeer had been the chairman and CEO of Genzyme for more
than 20 years. Under his watch, Genzyme had grown to be one of the top-five U.S.
biotechnology firms. It first established its footprint in the treatment of rare genetic disorders, but
its subsequent growth was the result of acquiring nascent biotechnology companies. Genzyme
reached record revenues of $4.6 billion in 2008 and was expected to generate an increasing level
of free cash flow in coming years. But operational problems in one manufacturing plant had led
to a warning letter in late February 2009 from the U.S. Food and Drug Administration (FDA),
which, combined with news on impending health care reform, had pushed Genzyme’s stock price
from a high of $70.42 down to a low of $56.38.
Genzyme was being targeted by Relational Investors (RI), an “activist” investment fund
that had a 2.6% stake in the company at the end of March 2009. RI had a history of engagements
with the boards of numerous companies that, in several instances, resulted in the CEO’s forced
resignation. Ralph Whitworth, RI cofounder and principal, met with Termeer and delivered a
presentation, arguing that Genzyme was trading at a discount. He offered recommendations on
how Genzyme could address this: (1) improve capital allocation decisions; (2) implement a
share-buyback or dividend program; (3) improve board composition by adding more members
with financial expertise; and (4) focus executive compensation on performance metrics.
Students are tasked with assuming Termeer’s role as scheduled a return phone call to
Whitworth. Meanwhile, Termeer realizes he needs to frame a strategy for dealing with
Whitworth. Should he fight Whitworth while fixing the manufacturing plant issues and risk
being ousted, or should he welcome Whitworth’s advice on how to create shareholder value but
then risk losing control?
This teaching note was prepared by Professors Kenneth M. Eades and Pedro Matos. Copyright 2012 by the
University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an
e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.
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Teaching Objectives
The case focuses on corporate governance issues by discussing how the objectives of a large
activist shareholder can potentially conflict with the core vision of the target company’s
management. Students will encounter issues such as how capital investment and payout policy
decisions can affect shareholder value creation. The case offers an opportunity for discussion on
how board composition and executive compensation may help align management with
shareholders’ interests in a public company.
Target Audiences
The case is effective as a “theme setting” experience for students new to finance. For
example, it can be taught as a first case in an introductory finance course for MBA students. The
case will help students appreciate that capitalism is at its best when resources are collected to treat
rare diseases for which there had been no treatment or cure. But a public company has a
responsibility to its investors, and that can create conflicts between its management and
shareholders. In other words, the case displays what is best and what is worst about free market
economies and provides strong motivation for students to learn about and understand corporate
finance.
The case can also be successfully taught to more experienced students or executives. For
example, we have taught the case at the Darden School in a second-year MBA elective class
(Corporate Financial Policies). More experienced students or executives who can analyze financial
statements and properly evaluate investment decisions will be able to discuss the corporate
governance issues in more depth.
Supporting Materials
The case materials include two video clips featuring Genzyme CEO Termeer:
Intro Video: “Henri Termeer Introduction” (available at http://youtu.be/6LF_CB7Pa3U)
Epilogue Video: “Epilogue” (available at http://youtu.be/BPD7wpEXTDg)
Although the case requires little manipulation of exhibit data, for the convenience of the
students and the instructor, a supporting student spreadsheet is provided:
For students: UVA-F-1660X
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Suggested Student Assignment Questions
1. What is the business model for Genzyme? What does Termeer want for his company going
forward?
2. What is the business model for Relational Investors?
3. Should Termeer fight Whitworth, or can he manage him by agreeing to some of Whitworth’s
demands (listed on page 8 of the case) but avoid giving into demands that might
compromise the core mission of Genzyme?
4. Why is Whitworth arguing that Genzyme needs to implement a share repurchase program?
What problem would a share repurchase solve? Couldn’t Genzyme just as easily announce a
dividend to achieve the same objective of returning cash flow to the shareholders?
5. Is there any way Termeer could have avoided this conflict with Whitworth, or was it
unavoidable?
Time Allocation Plan for 85-Minute Class
5 min. “Henri Termeer Introduction” video: (How Should Termeer Answer Whitworth’s
[Relational Investors] Call?)
15 min. Discuss the business model for Genzyme. How does a biotechnology company
succeed?
15 min. Discuss RI’s objectives. How can an activist investor be successful?
20 min. Evaluate each of RI’s demands. Are they reasonable? How do they conflict with
Genzyme’s business strategy?
15 min. How should Termeer respond? Class vote.
5 min. Why did this happen? Was it avoidable?
10 min. Video Epilogue
Board Plans
It is suggested that instructors use three boards: one for Genzyme’s business model, another
for RI’s strategy and success, and the third to list and evaluate what RI demands from Termeer.
Exhibits TN1, TN2, and TN3 provide detailed suggestions for organizing each board.
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Board Plans
Board One Genzyme What’s a biotech company?
How do you succeed?
Genzyme’s business model
Financial strategy
Board Two Relational Investors What is Relational Investors?
Keys to success?
Why target Genzyme?
Board Three Issue Relational
Investors’
Criticisms
Genzyme’s
Defense
Class
Recommendations
Capital allocation
Share repurchase
Board composition
Executive pay
Discussion Questions and Analysis
The class discussion will naturally follow the sequence suggested by the study questions.
