Did he resign, was he fired, or both of the above? ESC Medical Systems, now Lumenis (Nasdaq: LUME) CEO Yacha Sutton’s exit from the company has given rise to an ostensibly semantic argument. Did he himself decide to resign? Was he pushed out, or was he simply fired because of poor business performance? We’ll never know for sure, but a CEO doesn’t usually resign his position if the company is prosperous and growing. The case of the replacement of Eli Hurvitz by Israel Makov as president and CEO of Teva (Nasdaq: TEVA) is an example of how a large, successful company grooms the heir apparent ahead of time, thereby avoiding unnecessary shake-ups.
Sutton, however, is not Hurvitz, and Lumenis is not Teva. Sutton is leaving a company loaded with debt, and in deep crisis. You don't need glasses to see that Sutton didn’t leave the company because the travel to the US was too strenuous for him, or because his contract expires at the end of the year, and he decided he wanted a change of scenery.
”Absolute nonsense,” was Sutton’s response to the “Globes” exclusive three weeks ago about his looming resignation. “A total fabrication,” Sutton declared. Did leaving his position as Lumenis CEO last week take him unawares? It’s true that Sutton’s contract expires at the end of December, and he had probably indicated he would leave, but in such a manner?
A clash of wills
Why didn’t Sutton stay on the job another few months, until a permanent replacement is found? What was so urgent about replacing the Sutton as CEO and appointing vice chairman Arie Genger as temporary CEO? Why was a company in crisis left without a permanent CEO? If Sutton really wanted to resign, why didn’t they look for a replacement in the past few months? As always, the truth lies somewhere in the middle. There may have been a clash of wills between Sutton and his board of directors. Sutton may have wanted to have done with the matter, and the board may have wanted to bring new blood into the company to get it out of the mud. Either way, Lumenis was unwilling to allow Sutton to remain in his position even a single day after the end of his official contract.
”I’m grateful for my connection to Lumenis. After completing the company budget for 2003, I feel it’s the right time for a change,” Sutton said in the company announcement, which did not reveal what really went on behind the scenes. Sutton may have been more grateful had he remained another few months with the company, at least until it achieves a positive cash flow. Sutton himself predicted the company would reach this point within a quarter or two, but he won’t be announcing the results as CEO. On the other hand, over the past year, Sutton made a number of overly optimistic predictions about Lumenis’s performance.
The “Ma’ariv” Hebrew daily reported last week that Sutton tried to get rid of COO Sagi Genger at the last company board meeting. He didn’t succeed, and found himself on the way out. The company emphatically denies the report, saying, “Yacha never tried to get rid of Sagi; the entire story is a total fabrication.”
The board meeting mentioned by “Ma’ariv” was probably one of the company’s most important. The board convened on December 16 for an especially long session to discuss the 2003 company budget, which is absolutely crucial for Lumenis. A source familiar with the company told me the budget includes dramatic changes in both spending and strategy. Sutton, incidentally, was fully involved in preparing the budget.
The Lumenis share is at an all-time low of $1.80, reflecting a value of $66 million for a company with annual sales of $360-370 million, and the company is replacing its CEO. The company’s peak market cap was $1 billion. The company owes Bank Hapoalim $176 million, and is having a tough time creating a positive cash flow.
Sutton was appointed CEO of Lumenis (at that time still ESC Medical) in June 1999, after Arie Genger completed his takeover of the company. Arie Genger knew Sutton from Laser Industries, where Sutton was CEO. Sutton revitalized the company, and eventually merged it with ESC Medical, then managed by Dr. Shimon Eckhouse. Arie Genger brought his then 27 year-old son Sagi in as CFO. “It’s obvious that I got the job because I’m Arie’s son,” Sagi later admitted. “I was the only one stupid enough to agree to a 75% salary cut, leave my wife (temporarily), and enter a company on the brink of bankruptcy.”
Sagi Genger’s “stupidity” later proved very profitable. He has received $3 million in salary and options since joining the company. Nor is that all; “Globes” recently reported that Genger bought an apartment in New York for $2 million with a loan from Signature Bank of the Bank Hapoalim group, after obtaining a guarantee from Lumenis. Bank Hapoalim is Lumenis’s largest creditor. To obtain the guarantee, Sagi Genger gave a lien on his Lumenis shares, which are currently worth only $480,000.
In February 2001, Lumenis and Sutton made their big move: the acquisition of Coherent’s (Nasdaq: COHR) medical equipment division for $228 million. The acquisition doubled Lumenis’s sales and made it the world leader in the field of laser and light-based medical aesthetic equipment. Coherent was particularly strong in laser ophthalmic equipment.
Coherent was allocated 5.4 million Lumenis shares for the deal (at the time, the Lumenis share was at $17) and $100 million in cash. The rest of the acquisition price was raised through an issue of bonds on the company’s future performance. The agreement gave Coherent 14.7% of Lumenis, making it the largest shareholder in the company.
Generous bonuses for completing the deal were awarded: $750,000 to Sutton and $500,000 to Sagi Genger.
Lumenis’s descent into difficulties, which probably paved the way for Sutton’s exit from the company, began in February 2002. The US Securities and Exchange Commission (SEC) opened an investigation against the company, following suspicions regarding accounting irregularities and the company’s links with its suppliers. Immediately after the investigation began, Lumenis failed to meet its forecasts for the fourth quarter of 2001, after twice announcing that it would meet them. The company also fell short of its own forecasts for the first and third quarter of 2002, and its share sank like a stone from $30 to less than $2.
A revolving door for CFOs
At the same time that it was under SEC investigation and failing to meet its forecasts, Lumenis began a revolving door policy for its CFOs. Asif Adil replaced Sagi Genger, who became COO, to be replaced six months later by Sharon Levita, who was shortly thereafter replaced by Kevin Morano, the current CFO. In addition, investors began to file class actions against the company. Adil also sued the company, claiming he was fired because he reported accounting irregularities to Sutton and company chairman Jacob Frenkel.
Arie Genger, vice chairman of Lumenis, will be acting CEO starting in 2003. He has controlled the company since July 1999. Genger is described as Lumenis's controlling shareholder, but this is rather misleading. He holds only 2.3 million company shares, amounting to 6.2% of the share capital. Even this figure is misleading, since it includes 1.3 million 60-day options that are certainly out of the money. Even the addition of the 268,000 shares of his son, Sagi Genger, does not substantially alter the picture. Genger holds barely 3% of Lumenis, and is still mistakenly perceived as the “controlling shareholder.”
The largest shareholder in Lumenis is now Coherent, which sold its medical equipment division to Lumenis for 14.7% of the latter’s shares. This makes Coherent both the largest shareholder and the chief victim of the crisis in Lumenis. Genger was smart enough to secure his control in the sale agreement with Coherent, by neutralizing the voting rights for Coherent’s shares. Genger’s holdings are worth only $2 million. Keep in mind, however, that he made his pile in June 2001, when he sold a share package of 4.4% of Lumenis for $33 million, half of the current company market value, at $27.40 per share, 15 times the current market price.
Besides Genger and Coherent, there are three institutional investors in Lumenis, including Deutsche Bank, which jointly hold 22.5% of the company. Bernard Gottstein, Genger’s partner in his 1999 Lumenis takeover, holds 5.6%. This ownership structure theoretically makes a hostile takeover of the company possible, just as Genger exploited the wide distribution to take over the company in 1999, and eject Eckhouse. Ostensibly, $20-30 million would be enough to take over a company with a sizeable potential, which leads in its field, despite its heavy debts.
Lumenis was aware of the possibility. In April 2002, after the share price plunged to $10, they instituted a poison pill in the form of a rule that when any shareholder reaches a 15% holding, rights will be allocated to buy shares at half the market price. This mechanism may have been effective when the market price was $10, but is no longer so, now that the share price has fallen below $2, because the premium to be paid by those making a hostile takeover is fairly marginal.
Will some investor do to Genger what he did to Eckhouse? Wait and see. The possibly certainly exists.
Sutton will rack up $11-12 million when he leaves Lumenis. He will have earned more in the three and a half years at Lumenis than in his entire previous managerial career.
The conclusion is that talented managers can double their salaries when their company prospers, but it takes exceptional talent for managers to accomplish this when their companies are taking a tumble.
Published by Globes [online] - www.globes.co.il - on December 24, 2002