Carl Icahn Issues Open Letter to Illumina (ILMN)

Carl Icahn Issues Open Letter to Illumina (NASDAQ: ILMN):

Dear Fellow Illumina Shareholders:

We know from talking with many of you that there is extreme displeasure among the owners of Illumina. $50 billion of value has been wiped from the company’s market capitalization since August 2021. This value destruction is a direct result of a series of ill-advised (and frankly inexplicable) actions taken by the board of directors of our company in connection with the acquisition of GRAIL, Inc. To paraphrase William Shakespeare’s Hamlet, something is rotten in the state of Illumina.

We fancy ourselves to be reductionists. Let’s simplify this complex situation with the following example. At the end of the example, ask yourself: what would you do?

Imagine that you inherited control of a large family-owned business.

You hire a management team and a board of directors to look after the company for you.

The resumes of your team members explain that they are “fiduciaries” (i.e., stewards who are trusted to manage capital and assets solely for the benefit of the owners – not themselves). They collectively own an infinitesimal number of shares in the company (around one-tenth of one percent) that you have given them as part of their compensation, but otherwise have no equity stake in the business.

The company is doing well. It is a market leader in a high growth field. The company also owns some smaller venture businesses.

Without asking your permission, or even giving you advance notice, your management team and board of directors decide to spin off the venture business, raising new capital of approximately $2 billion from a group of highly sophisticated investors.

A few years later, your management team and board of directors decide (again without your permission or advance notice) to offer those same investors a staggering $8 billion to buy back the venture business, resulting in a profit to these investors of a staggering $5.3 billion.

The venture business your management team and board of directors bought back, in their infinite wisdom without telling you first, happens to make exactly zero dollars in revenue. In addition, within a year following the repurchase transaction, your company is forced to take a $3.9 billion impairment charge, suggesting that your team vastly overpaid. That would be enough to make anyone upset! However, the problem is much more egregious than simply overpaying.

Prior to the closing of the acquisition of the venture business, your management team and board of directors are advised that regulatory bodies in the United States and Europe intend to block the deal. The regulators in Europe actually prohibit them, in very formal, harsh and explicit terms, from closing the deal.

Incredibly, your management team and board of directors (yet again without telling you first) decide to brazenly thumb their noses at the European regulators and close the deal anyway! This utterly reckless action obligates your company to pay a fine to the European regulators that could reach $458 million. In addition, your team is required to hold the venture business separate from your company – thus robbing your company of realizing any benefits whatsoever from the combination (but nevertheless obligating your company to fund the venture business to the tune of $800 million annually). Perhaps overpaying for the venture business can be forgiven, but it is inexplicable and unforgiveable that under these circumstances the management team and board of directors went ahead with the deal anyway without first ascertaining whether they would get clearance from the European regulators.

But it gets even worse! Your team tells you that, in addition to overpaying to repurchase the venture business, incurring massive fines and obligating you to spend a fortune to fund the business without realizing any synergies, there is a very good chance that the European regulators will force you to divest the business. And if your team is miraculously able to sell the business for the same value you just paid to repurchase it, your company could be forced to pay $1.75 billion in taxes!

Incredibly, these were all risks that your team of geniuses knew or should have known prior to inking the deal and yet they plowed ahead anyway! To your utter disbelief and dismay, the management team and board of directors do not apologize for their actions, but rather press ahead and vow to use your money to appeal every decision of the European regulators until the end of time – no matter how much money you lose.

It is unclear to you even now whether your trusted team of fiduciaries even consulted competent legal counsel prior to declaring war on the European regulators or, if so, whether they followed the advice they received.

So what would you do? I know what I would do. The management team and board of directors that created this mess would be fired immediately and a thorough investigation would be conducted to ascertain whether they engaged in gross negligence (or even worse).

Illumina’s share price performance, and the $50 billion of value destruction that has occurred since the GRAIL deal was closed, clearly shows that shareholders have lost faith in Illumina’s management team and board of directors. Yet these individuals suffer no consequences or remorse. The members of Illumina’s management team and board of directors collectively own less than 0.1% of the company’s stock yet they feel entitled to take these reckless actions with our money.

For the past few weeks, we have been working privately to try to find a way to help Illumina and our fellow shareholders. Unfortunately, our efforts have failed to gain traction with the Illumina board and we have therefore determined to launch a proxy contest to attempt to gain board representation due to our fear that Illumina’s directors will pursue GRAIL until the end of time without regard to the amount of value destruction they leave in their wake. We are today announcing our intention to nominate three highly qualified individuals to Illumina’s board of directors at the upcoming annual meeting of shareholders, who will tirelessly pursue justice for ALL shareholders.

We believe our three nominees will bring a badly needed dose of sanity to Illumina’s boardroom. We are convinced that at least three shareholder representatives are needed on Illumina’s board to attempt to put an end to this insanity now before the reckless decision making escalates into a no-return situation. The reckless decision to close the GRAIL deal over the objections of European regulators created a staggering amount of risk. To repeat the risks:

Illumina is now forced to pay $800 million in annual operating costs but has no control of GRAIL and can’t realize any synergies from the acquisition;
Illumina may have to pay a $458 million potential fine;
Illumina may have to pay up to $1.75 billion in taxes if the company is forced to divest GRAIL at the same price for which it was just purchased; and
Illumina would be a forced seller in a deteriorating market of an asset the company acquired at an exorbitant price.

We can be sure of one thing – if Illumina continues on its current path, the cost of fighting powerful regulators, especially when they obviously believe strongly in their position, will become extremely expensive no matter what happens. Someone should have mentioned to our “genius board” that fighting a huge government agency involving antitrust is not like fighting a competitor, especially when you just insulted the regulatory agency. That is why any board with a modicum of common sense never closes a transaction of this type without obtaining the necessary antitrust clearances. It is totally inexplicable that Illumina’s management team and board of directors did this. They will likely tell you not to worry about these risks because Illumina can just borrow money – but to preempt this argument – this might have been the case before, but in today’s environment banks and lenders are extremely skeptical to lend to companies in financial quicksand like Illumina finds itself in today. We believe it is essential that Illumina extricate itself immediately from the dire position it might well sink into financially if it remains on this perilous course.

Icahn Enterprises’ specialty over the last 25 years has been investing in companies that are in crisis. I and my team have dealt with many difficult situations. There are many examples of management teams and boards that at first were against us, but now credit us for making hundreds of billions of dollars for ALL shareholders. These companies include Motorola, Cheniere, Apple, Netflix, Caesars, Herbalife and Forest Labs, just to name a few. In almost every case, Icahn Enterprises (IEP) invested hundreds of millions of dollars of our own capital in these companies and greatly enhanced value not only for ourselves but for ALL shareholders. As it has been said, the proof of the pudding is in the eating. Let us quickly look at the results. On January 1, 2000, the closing sale price of IEP depositary units was $7.63. On March 10, 2023, IEP depositary units closed at $50.40, a 2,259% increase. This translates to an annualized return of approximately 15% (including reinvestment of distributions into additional depositary units and taking into account in-kind distributions of depositary units). Comparatively, the S&P 500, Dow Jones Industrial, Russell 2000 indices and Berkshire Hathaway Class A shares increased approximately 308%, 379%, 375% and 721%, respectively, over the same period, which translates to an annualized return of approximately 6%, 7%, 7% and 9%, respectively (including reinvestment of distributions into those investments).

Most companies in which we’ve invested have had major problems that we’ve helped to correct. But the situation at Illumina is much more dangerous than these other companies in that, if Illumina continues on its current path, there will be an existential threat to investors because the directors seem to be tone deaf to the great problems they now face. As recently as the March 7th Cowen investor presentation, Illumina’s management basically telegraphed a message that they will keep appealing and fighting no matter what it takes. As we have already said, this company does not have the wherewithal to continue this fight, especially given today’s markets. It is laughable that Illumina’s management said that it wants to fight on to “get the best value for our shareholders.” Their strategy certainly didn’t work for shareholders in the last year and a half, when they managed to lose $50 billion in shareholder value. They just cannot stop appealing and fighting. It is easy for them to say they should fight on forever, as they have no skin in the game. They are literally fighting a war with our money. It reminds me of the old saying: “Generals die in bed.”

Illumina’s current management team and board of directors have given the word irresponsibility a new meaning. They have decided to “damn the torpedoes – full speed ahead” (or, as one commentator put it, “regulators be damned”). They forget that today’s macro environment is not the same as yesterday’s. The capital necessary to keep fighting on, with all of the expenses and penalties mentioned above, will be literally enormous. Banks today are making it difficult generally for companies without very strong balance sheets to borrow. But in the case of Illumina, which is now caught in quicksand, we believe it will be almost impossible to raise the capital needed. We feel strongly that our three highly qualified nominees are particularly suited because of their experience to help keep Illumina from sinking further into the quicksand. We look forward to meeting with you over the coming weeks and introducing you to our three highly qualified nominees.

Sincerely yours,

.

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Carl C. Icahn

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