Smith & Nephew, a British portfolio medical technology company, operates globally in the development, manufacturing, marketing, and selling of medical devices and services. The company is structured into segments including Orthopedics, Sports Medicine, Ear, Nose, and Throat, as well as Advanced Wound Management. While it has a strong presence in the market, there are operational challenges affecting its overall performance.
Operational Challenges
One of the key issues plaguing Smith & Nephew is the decline in operating margins in its Orthopedics segment, dropping from 23% in 2019 to 11% today. This decline is attributed to supply chain management, logistics, and manufacturing issues leading to backorders and inefficiencies in the delivery of implants and tools required for procedures. Furthermore, the company has experienced significant management turnover in recent years, making it challenging to implement a long-term operational strategy.
Cevian Capital, an investment firm known for its active ownership in European-listed companies, has acquired a 5.11% stake in Smith & Nephew. Cevian sees potential in the company’s fundamentally attractive business but recognizes the need for operational improvements to drive long-term value. With a focus on enhancing operational performance, Cevian aims to assist Smith & Nephew in addressing its challenges, particularly in the Orthopedics segment.
Potential Solutions
Smith & Nephew’s path to success lies in the implementation of a comprehensive 12-point plan aimed at fixing the issues within the Orthopedics segment. By improving supply chain management, logistics, and manufacturing processes, the company can regain momentum and increase market share. Additionally, addressing the management turnover by establishing stable leadership will be crucial for the successful execution of the operational plan.
Cevian’s long-term activist approach aligns well with Smith & Nephew’s needs for sustained operational improvements. With an average holding period of four to five years and a focus on operational performance, Cevian is well-positioned to support the company in achieving its goals. By leveraging its experience in driving operational enhancements, Cevian can help Smith & Nephew boost the operating margins of its Orthopedics division to levels comparable to industry peers.
Given Cevian’s history of taking board seats in its activist positions, it is likely that the firm will play a significant role in overseeing Smith & Nephew’s operational transformation. By having representation at the board level, Cevian can provide strategic guidance and ensure that the company stays on track with its operational improvement initiatives. This level of involvement is crucial for driving long-term success and enhancing shareholder value.
Smith & Nephew’s operational challenges, particularly in its Orthopedics segment, have hindered its ability to generate shareholder value in recent years. With the support of Cevian Capital and a focused approach on operational improvements, the company has the opportunity to turn its performance around. By addressing supply chain inefficiencies, management turnover, and leveraging Cevian’s expertise, Smith & Nephew can unlock its full potential and drive sustainable growth in the medical technology market.