Solventum has a few levers to pull to build shareholder value with activist Trian.

Company: Solventum (SOLV)

3M Health Care, formerly known as 3M Health Care, is a global health-care company that was spun out from on April 1. It has four main segments: Medical Surgical, Dental Solutions, Health Information Systems, and Purification and Filtration. The Medical Surgical segment provides advanced wound care, sterilization assurance, temperature management, surgical supplies, stethoscopes, and medical electrodes. The Dental Solutions segment provides dental and orthodontic products and bonding agents that span the life of the tooth. The Health Information Systems segment provides health-care systems with software solutions, including computer-assisted physician documentation, direct-to-bill and coding automation, speech recognition, and data visualization platforms. Finally, the Purification and Filtration segment offers filters, purifiers, cartridges, and membranes.

Stock Market Value: $9.95B ($57.63 per share)

Activist: Trian Fund Management

Percentage Ownership:  n/a

Average Cost: n/a

Nelson Peltz, the manager of Trian, follows an "operational activism" formula that involves taking very few positions but being highly active in those positions. Peltz's goal is to enhance long-term shareholder value by working with the management of underachieving mid- to mega-cap, publicly traded companies to increase earnings through cost-cutting, divesting ancillary businesses, and improving brand recognition.

What's Happening

Solventum has been the subject of a report by Bloomberg News on July 22, stating that Trian has assumed a stake in the company.

Behind the Scenes

Solventum is a global health-care company that was spun out from 3M on April 1, with 80.1% of shares distributed to 3M shareholders and the remaining 19.9% retained by 3M to be monetized within five years following the transaction. The company has a leading market position in numerous categories, strong performance-driven products, and high brand loyalty. Solventum operates across four segments which accounted for $8.2 billion of revenue in 2023: Medical Surgical (56.5%), Dental Solutions (16.2%), Health Information Systems (15.7%), and Purification & Filtration (11.6%). The health-care business was consistently one of the strongest segments of 3M when it was part of the conglomerate structure, boasting the highest growth rate of any division and margins that exceeded the company average. For more than two decades, the business grew organically every year. Adding to that, the company has had 25%+ adjusted operating income margins and over $1.4 billion of free cash flow generation for each of the past three years

Solventum, a standalone company spun off from a conglomerate, has been underestimated and overlooked by the market due to its diverse portfolio of four medical-adjacent businesses. Each business operates independently with different technologies, customers, supply chains, and distribution channels. As a result, investors and sell-side analysts have struggled to analyze and understand the company. However, as a newly independent entity, Solventum has the potential to benefit from improved management focus, agility, and better alignment of management compensation with the value of the business.

Solventum has several levers for value creation, including re-accelerating organic growth, restoring margins, and simplifying its portfolio of businesses. As a pure play, Solventum should be more agile in implementing growth initiatives and just getting growth back to 4% would create value against a backdrop of a sell side consensus of no growth. The company has a 25% earnings before interest, taxes, depreciation and amortization margin, but this margin includes 800 basis points of corporate costs allocated to these businesses as part of 3M. As a standalone entity, it will need to remake some of these functions, but can also shed a lot of the heavy costs through management discipline. Lastly, simplification of the portfolio is necessary as Solventum has a core business and three non-core and non-synergistic businesses with different products, sales forces, customers, manufacturing and distribution. A sale of any of these businesses will allow the company to de-leverage its balance sheet, currently trading at 4-times net leverage, and initiate a dividend. There is no reason why this company should trade at a price-earnings ratio that's less than

Trian is a skilled income statement activist who has helped many companies improve margins and growth. The coffee cups in the firm's office read "Sales Up, Expenses Down," and Trian has also been a valuable corporate governance-oriented investor, creating tremendous shareholder value from the board level. However, what some may not realize is that Trian has extensive experience with spinoffs, such as Pentair, Kraft Foods, Dupont, Cadbury, Ingersoll Rand, and GE's health-care division. The most relevant spinoff is GE's health-care division, which Trian has been an active shareholder at since 2015 and called for both operational and strategic improvements. On Jan. 4, 2023, GE spun off its GE HealthCare division, and since then, GE HealthCare Technologies has returned 34.45% versus a return of 26.92% for the Russell 2000 over the same period.

While Trian has a history of being an active shareholder, the firm has also created tremendous shareholder value as an engaged director. In this situation, we believe that the latter is more appropriate. Trian has extensive experience in operational engagement in newly spun-off companies and addressing the issues and opportunities inherent in spinoffs. If there is an opportunity to divest one or more businesses, shareholders would have comfort with a financially astute shareholder representative on the board to evaluate competing offers and ensure the maximization of shareholder value. The board consists of 12 members with four directors in each class and will begin the process of phasing out the staggered board in 2025, to be fully de-staggered by 2028. Given the obvious fit, we would be surprised if this does not settle amicably with a Trian representative on the Board, but the director nomination window opens on Dec. 2, and Trian has never been one to shy away from a proxy fight if the firm feels it is necessary. It should be noted that 3M retained 19.9% of Solventum's common stock, but has agreed to mirror voting, which will compel it

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.