SAN FRANCISCO--(BUSINESS WIRE)--Voce Capital Management LLC (“Voce”) sent a letter today to the Board of Directors of Solta Medical, Inc. (“Solta”) (Nasdaq:SLTM) expressing its disapproval of recent actions taken by Solta, including the appointment of Mark M. Sieczkarek as interim CEO. Voce’s letter also reiterated that the best way to maximize Solta’s shareholder value is the immediate pursuit of a sale of the Company.
In its July 19, 2013 letter to the Board, Voce cautioned against the installation of any current Board member as CEO; the Board neither responded to Voce’s letter nor heeded the advice it contained. Rather, the Board replaced the Company’s CEO with its Chairman, Mr. Sieczkarek, who has been on the Board since July 2006 and been lead director since 2008. Voce’s letter states:
Every mistake that occurred during the previous management regime was made with Mr. Sieczkarek’s involvement. He was there to approve each of the five acquisitions Solta undertook; he blessed the serial dilution and exhaustion of the Company’s authorized share count. He tolerated not quarters but years of execution gaffes and uninterrupted losses. . . . [A]s the Board’s leader and senior member, he ultimately bears responsibility for the Company’s long-term record of shareholder value destruction as measured by Solta’s decimated share price. It all happened on Mark Sieczkarek’s watch.
J. Daniel Plants, Voce’s Managing Partner, added, “The decision to appoint Mr. Sieczkarek as CEO was disappointing enough, but we were appalled by his statements during the conference call. Mr. Sieczkarek made clear that his true intention is to become Solta’s permanent CEO and, not coincidentally, that the Company will not explore a sale unless it is forced to do so. If necessary, that’s exactly what we shall do.”
About Voce Capital Management
Voce Capital Management LLC is an employee-owned investment manager and the adviser to Voce Catalyst Partners LP, a private investment partnership.
The full text of Voce’s letter follows.
August 14, 2013
Members of the Board of Directors
Solta Medical, Inc.
25881 Industrial Boulevard
Hayward, CA 94545
Attention: Corporate Secretary
Ladies and Gentlemen:
We write to express our disapproval of recent actions of the Board of Directors of Solta Medical, Inc. (“Solta” or the “Company”) and to demand that you take immediate steps to maximize shareholder value.
When we first wrote to you on May 7, 2013, Solta shares traded at $1.75. The Company was in a free-fall following a disastrous Q1 and the dawning appreciation of the magnitude of the errant Sound Surgical acquisition. Following the defeat of your proposal at the annual meeting to double the authorized share count, and with the stock trading around $2.25, we wrote to you again on July 19, cautioning you against installing any current Board member as CEO and redoubling our call that you pursue a sale of the Company. Solta soared 8% that day, and continued rising, closing as high $2.76 (at one point reaching an intra-day high of $2.89). We advised you then that all of the appreciation in Solta’s stock had been as “anticipation grew within the investment community that you would undertake the review of strategic alternatives we’ve demanded,” and that it had been “those expectations, not Solta’s fundamentals, that continue to buoy the stock.”
You ignored these warnings to the grave detriment of Solta’s shareholders. All of our previously expressed concerns, and some new ones too, were on vivid display on August 6 when the Company reported a pitiful Q2 and confirmed shareholders’ worst fears: the inexplicable appointment of Mark M. Sieczkarek as Solta’s CEO. Even worse than the selection of Mr. Sieczkarek were his highly revealing statements on the conference call. In his own words, he made the case for why he is unfit to lead Solta, even on an interim basis, and for why an immediate pursuit of Solta’s strategic alternatives is the only acceptable path.
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“Given my six years of involvement on the Board, I have a strong working knowledge of the organization [and] the strategy….” – Mark M. Sieczkarek, Chairman, Interim President and CEO, Solta 2Q13 Earnings Call, August 6, 20131
Indeed. When we wrote on July 19, we specifically admonished you not to install a current Board member as CEO, even temporarily. We said:
[W]e’re emphatic that under no circumstances can Solta’s next CEO be appointed from the existing Board of Directors. . . . [W]ith all due respect none of the current Directors would be an acceptable choice as Solta’s CEO. . . . These individuals bear ultimate responsibility for Solta’s operational and financial failures and for its discredited acquisition strategy, including the most recent Sound Surgical transaction. Collectively, they have their fingerprints all over Solta’s current predicament and therefore none is a credible successor to Mr. Fanning. (emphasis in original)
And yet the Board’s solution to Solta’s self-created crisis was to replace the CEO with . . . its Chairman? Mr. Sieczkarek joined the Solta Board all the way back in July 2006 – before it had even conducted its initial public offering (priced at $7.00). He is the Board’s longest serving member and, until becoming Chairman in June of this year, had been the Board’s “lead director” since January 2008.
The cynical attempts in the Q2 earnings release, and on the conference call, to make the ousted CEO the sole scapegoat for Solta’s myriad failures was as inaccurate as it was transparent. To be clear: Every mistake that occurred during the previous management regime was made with Mr. Sieczkarek’s involvement. He was there to approve each of the five acquisitions Solta undertook; he blessed the serial dilution and exhaustion of the Company’s authorized share count. He tolerated not quarters but years of execution gaffes and uninterrupted losses. Throughout, he stood by as Mr. Fanning’s partner and enabler. And as the Board’s leader and senior member, he ultimately bears responsibility for the Company’s long-term record of shareholder value destruction as measured by Solta’s decimated share price. It all happened on Mark Sieczkarek’s watch.
It’s incomprehensible that anyone could believe Mr. Sieczkarek is a credible choice to run Solta for five minutes, let alone for several quarters pending the nominal search for external candidates or, heaven forbid, on a permanent basis. But that is apparently exactly what he seeks.
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“I am hitting the ground running in this role. And from my perspective as well, I’ve taken over two positions in my past history on a temporary basis and two years later I was still there. So don’t count me out.” (emphasis added) – Mark M. Sieczkarek, Chairman, Interim President and CEO
Unfortunately, we foresaw Mr. Sieczkarek’s power grab. Anyone present at the annual meeting in June would have noticed his bizarre and repeated invocation of his experience “as a former public company CEO” (more on how that worked out in a moment). In our July 19 letter, we “gather[ed] there are individual Directors interested in the job . . . [O]ne of those [directors] actually joined the Board even earlier, with Mr. Fanning, and has served alongside him the entire time.” That director was, of course, Mr. Sieczkarek.
We don’t believe for a second that Mr. Sieczkarek intends to serve only on an interim basis. By his own proud admission, he has a track record of finagling interim appointments into full-time gigs. He’s now made clear that’s his intention at Solta, too. Nor are we alone in this assessment; as one research analyst wrote, “it was evident by the actions being taken by Mr. Sieczkarek and statements made on the conference call that he is positioning to become the permanent CEO of Solta Medical.”2
In an effort to forestall his hiring, our July letter argued that a “temporary appointment doesn’t assuage [our] concern. In our experience that too is often merely a passage to the removal of the qualification ‘interim’, as the new executive auditions for a permanent role.” That’s exactly what’s transpiring here. We note Mr. Sieczkarek appears to have been unemployed since his dismissal from Conceptus in December 2011 and has no other Board seats to occupy his time, either.
This interim-but-not-really status isn’t simply disingenuous; it poses conflicts of interest and compromises the Board’s ability to fulfill its corporate governance responsibilities. For starters, how can the Board allow Mr. Sieczkarek to retain his role as Chairman of the Board while serving as CEO? It has been only two months since Solta separated the roles of Chairman and CEO. At the time, Ms. Graebner, the Chairman of the Board's Nominating and Governance Committee, stated this was necessitated by its "review of corporate governance and best practices.” If it was “best practices” to have an independent Chairman in June why isn’t it now?3
Furthermore given his ambitions Mr. Sieczkarek shouldn’t be allowed to helm the Board by leading its meetings and setting its agenda. His role is particularly concerning as the Board navigates all of the critical choices before it, such as “should we sell the Company?” and “should we bring in a new CEO instead?” As Chairman he will not only influence these decisions, but shape and direct them, just as he consolidated his recent assumption of the Chairmanship to maneuver his way into the CEO role.
Mr. Sieczkarek has made clear that he has a vested, personal interest in the outcome of these decisions that is not necessarily aligned with – and quite possibly adverse to – the best interests of shareholders. Given his thirst for the permanent CEO position, how can Mr. Sieczkarek be trusted to impartially vet other potential CEO candidates? How can his forecasts and projections for the business, which are now under his control, be relied upon as objective when the Board weighs whether to sell the Company or remain independent?4 His very presence taints the credibility of any decisions the Board may make, and we dispute the Board’s ability to exercise its fiduciary duties with him as their leader.
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“[I]n . . . the aesthetics industry, and I am speaking almost as an outsider looking in, you fall into patterns and everybody falls into the same pattern. I think sometimes, somebody who can disrupt that is the best way of getting not only the company, but the industry moving forward as well.” – Mark M. Sieczkarek, Chairman, Interim President and CEO
Even if one gets beyond Mr. Sieczkarek’s ownership of Solta’s failed track record, we’re at a loss to see what other qualifications he has to offer Solta at this crucial moment. Could it be his eight-year tenure at Conceptus, during which time he delivered shareholder value that compounded at about 2% annually?5 His replacement, Mr. Grossman, was able to turn Conceptus around and, within eighteen months, sell it for approximately three times the price it traded for at the time of Mr. Sieczkarek’s termination.
The attempt to sell his lack of experience as an asset was particularly unconvincing. Most of Solta’s competitors are led by long-serving executives whose expertise and industry bona fides don’t seem to have impeded the creation of shareholder value at their companies. We are inclined to side with the view of other, knowledgeable observers: “[T]he company is now without a tenured, aesthetics market, senior leader while at the same time facing an increasingly competitive market with new product cycles and strong momentum from key players in the aesthetics industry.”6
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“We believe the best and fastest way to build returns for our shareholders is by increasing the strategic value of our assets.” – Mark M. Sieczkarek, Chairman, Interim President and CEO
A common refrain from underperforming companies – and especially from their managers, who wish to keep their jobs – goes something like this: “Now is not the right time to sell the company. Let’s fix things first and get the stock price up before thinking about selling.” It’s seductive logic but very often wrong. Companies that spend years digging themselves into a deep hole often find it difficult to climb back out of it quickly, if at all.
So it is with Solta. The Company has suffered from long-term mismanagement and has mortgaged its future through a series of grave errors in judgment, with ill-timed, ill-priced and ill-structured acquisitions leaving no margin for error. There's no silver bullet here and no basis to expect Mr. Sieczkarek can suddenly turn things around. Despite his tough talk on the call – he used the word “aggressive” six different times – he was woefully short on specifics. As another analyst wrote after the call, “given operational challenges and time constraints (via increased competition, investor impatience, and liquidity limitations), we are skeptical that a turnaround can be successful.”7
While we continue to believe Solta’s assets are attractive, the only way to unlock their value is in the hands of a more successful operator; fortunately, there are several that are interested and shareholders can share in at least some of that value now through a strategic premium. By comparison, even if one were to believe meaningful stand-alone improvements were possible, the time and risks involved would have to be discounted heavily before concluding shareholders were better served waiting for those to potentially materialize versus taking the certain value in a sale today. During that time, one would also need to account for the risk that Solta’s exit options might narrow as industry consolidation proceeds around it. Finally, anyone pining for the “good old days” should remember there are now 30% more shares outstanding versus a year ago.8 Getting back there is not only operationally, but mathematically, much more difficult now.
The only thing that has increased the stock price this year has been the expectation the Company would be sold. Recall Solta touched $2.89 not that long ago – solely on take-over speculation. Attempting to rebuild the stock through a complex turnaround, at the hands of a dubious leader, in the hope of then selling the Company off of a marginally higher base is worth neither the time nor the risks. We agree with the final assessment of yet another research analyst who said: “SLTM's stock performance is more heavily linked to take-out prospects, which very well may be SLTM's best option given that a turnaround as a stand-alone – even under new leadership – could prove challenging and lengthy.”9
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“When you’re looking at strategic alternatives, ultimately you can, I guess, put yourself up on the block specifically or kind of sit back and wait. And as I said, you need, kind of a credible offer that you can respond to in order to consider a strategic alternative.” – Mark M. Sieczkarek, Chairman, Interim President and CEO
We have publicly called for Solta’s Board to conduct a review of all strategic alternatives, meaning a sale of the Company, three separate times to no avail. Mr. Sieczkarek was asked several times on the Q2 call what specific “mechanisms” Solta planned to use to “evaluate credible strategic alternatives,” as stated in the Company’s press release. In response, he reiterated the same themes of passivity and reactivity quoted above. Solta would respond if “presented with alternatives;” it would look at “strategic alternatives, that’s presented to ourselves [sic].” Leaving no ambiguity, he stated: “Now I’ve said it, probably five times on this call that we’ll certainly consider other alternatives, but they have to be there to begin with for us to consider them.”
That’s just plain wrong, and the self-proclaimed “former CEO of a public company” presumably knows better. Evaluating “strategic alternatives” means proactively approaching potential buyers of the Company to assess whether selling Solta now will create more shareholder value than remaining independent. It’s not simply an exercise in waiting to see whether the postman delivers a fully-negotiated offer that the Board need only review and sign. Properly ascertaining acquisition appetite requires engaging a credible investment bank to solicit interest from likely parties; a professional financial advisor can construct a process to procure proposals, with a deadline, that can be compared to one another and to the status quo and evaluated on a consistent basis. With a desirable asset such as Solta, which has already drawn substantial acquisition interest, competition can be used to drive price and timing.
It’s all so basic one doubts that the Solta Board actually doesn’t get it. So why the reluctance to hire a banker to reach out to potential buyers? With a deposed CEO, two director resignations, a shareholder mutiny and an industry consolidation frenzy it’s hardly a big secret that Solta is in play. Rather, it appears the Board is attempting to raise the bar for potential buyers. By placing the burden on acquirers to launch an unsolicited proposal, Solta seeks to dissuade interested parties who may be squeamish about being labeled a “hostile” bidder; or hopes others might hesitate to allocate scarce resources in pursuit of an attractive acquisition target that’s held hostage by an entrenched Board.
Through its demure posturing the Solta Board also preserves its ability to dismiss as unserious, preliminary, conditional or inadequate any inbound interest it does receive. We already know several companies reached out to Solta recently and got nowhere. Yet how can interested parties deliver specific, unconditional proposals – with their best price and terms – without access to customary due diligence?
We can glean some insight into how the Solta Board discharges its fiduciary duties when it receives inbound acquisition interest from the way it acquitted itself during the contested acquisition of Reliant in the summer of 2008. After announcing the proposed transaction it received two unsolicited, competing offers to purchase Thermage (Solta’s predecessor entity) as an alternative to the consummation of the Reliant acquisition: One for $4.50 per share (with Thermage then trading at $2.52) and another for $5.50 per share (with Thermage then trading at $2.98).10 Not only did the Board reject both offers on the belief that “the value of Thermage was well in excess of the price per share proposed” by each bidder – laughable then and absolutely incredible now – but the Board refused to even engage in discussions with either party or provide them with access to due diligence to see whether they could improve their offers. The Board’s lead independent director at the time? Mark M. Sieczkarek.11
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Our views on Solta are widely shared throughout the aesthetics industry and investment community, including by many of our fellow shareholders. If, as Mr. Sieczkarek asserted, the Board is truly committed to “act in the best interest of the shareholders going forward,” it must form a Special Committee of independent directors. Given the conflicts of interest that run amok at Solta, the Special Committee should be given oversight of the pending search for external CEO candidates and, most importantly, the Special Committee should retain a reputable investment bank to pursue a sale of Solta forthwith. We will accept nothing less and directors that obstruct this should expect to be held accountable by Solta’s shareholders.
VOCE CAPITAL MANAGEMENT LLC
By: /s/ J. Daniel Plants
J. Daniel Plants
1 All block quotes from Mr. Sieczkarek at the beginning of sections are from the 2Q13 earnings release or conference call.
2 Canaccord Genuity, August 7, 2013.
3 The appointment of Hal Covert as “lead director” is meaningless, as Mr. Sieczkarek himself was “lead director” at the time the Board concluded in June that “best practices” required Mr. Fanning to relinquish the gavel to an independent Chairman, rather than continued reliance on a “lead director” to discharge the Board’s corporate governance responsibilities. It also bears mention that 40% of the shares abstained or voted against Mr. Covert’s unopposed reelection to the Board in June, hardly a ringing endorsement for his purported role as guardian of shareholder interests.
4 It’s instructive to note what Conceptus had to say about Mr. Sieczkarek’s forecasting abilities on the very first earnings call after his departure: “[W]ith Keith’s [Grossman] arrival we are returning to the mantra of providing guidance that is conservative and realistic and not based on best case thinking. We clearly lost sight of this in the past two years ….” Gregory E. Lichtwardt, CFO, Conceptus, 4Q11 earnings call, February 23, 2012.
5 Several current Solta shareholders were investors in Conceptus under Mr. Sieczkarek’s leadership.
6 Canaccord Genuity, August 7, 2013.
7 Cantor Fitzgerald, August 7, 2013.
8 Solta’s stock price was $3.27 on July 31, 2012, with 61.9 million shares outstanding. At July 31, 2013 there were 79.8 million shares outstanding.
9 Leerink Swann, August 7, 2013.
10 Amendment No. 5 to Form S-4, dated November 18, 2008.
11 Two other current directors, including the current “lead director” Mr. Covert, were also on the Thermage Board at the time. None covered themselves in glory.