The Price of Expansion

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Depending upon the particular responses from executives and directors, Whitworth would follow one of several paths. He might request certain changes or consider making criticisms public. Resistance might result in isolated pressure on one or more executives or board members. In other instances, Whitworth might request a seat on the board, suggest a change in executive management or board composition, or initiate a proxy fight.

- If the first recommendation is met, the company will increase its income generation in the genetic disease segment. And it will not have to face decline in stock price.

- If the second request is followed the stock price will rise, but the company will have to use debt to leverage the share repurchase. In 26 years the company as never used debt.

- If the third recommendation is met, there will be a better assessment of the projects to be invested in before taking a decision, and the board will not blindly follow the diversification and expansion vision of the CEO.

- If the fourth request is met, the board will ensure the implementation and the performance of the project after taking the decision on following a particular project.

Alternatives

After considering all the recommendation, the CEO made an assessment and had to choose between three alternatives.

1. Fight Whitworth and enlist the board to join him in what would be a public relations battle for shareholder support.

2. Welcome Whitworth onto the board to reap the benefits of his experience in how to create shareholder value. In this regard, he could think of Whitworth as a free consultant.

3. Manage Whitworth by giving him some items on his list of demands but nothing that would compromise the core mission of Genzyme.

The implications of the first alternative would be bad as, this is the second activist investor that offers similar recommendation, Carl Icahn, who had purchased 1.5 million shares of Genzyme during third quarter 2007 was the first one. The CEO had strongly protested Icahn’s involvement, and with the support of the board made a public plea to shareholders that ultimately led Icahn to sell his Genzyme shares. If this happens again, given the evidence showing bad investment decisions and the 21% decline in price, the CEO might not get the board’s backup.

The second alternative implies that the recommendations would be taken into account and the company would survive future crises but Whithworth does not get to sit on the board table. Though this alternative would affect the CEO’s ego by undermining his 26 years making the company profitable without taking debts and paying out dividend, this alternative would be good to follow.

The third alternative touches the core mission of Genzyme, which is not to pay dividend but retain earnings to reinvest for future growth. This is a dilemma as RI is targeting future cash flow. The best alternative would be the second one.

Conclusion

The case depicts the source of the problem and highlights the recommendation accordingly. We can learn from this case that the President and CEO treated his company like a child and believed he has helped it grow and nurtured it for 26 years knowing exactly what is best for it. Having an activist investor, holding shares for less than a year to dictate what is best for Genzyme hurt the CEO’s ego. Especially, suggesting solutions that are perceived to be in contradiction to the company core mission. The four recommendations given by the RI were touching the key points in which Genzyme was growing weak. The second alternative is the best way forward for Henri Termeer as it will save the company and he will not have to step down in a disrespectful manner, as this would be the result if he does not compromise. The board of directors still have fiduciary obligation to its shareholders, which is generating profits and this are the recommendations suggested.