PAREXEL International Corporation (PRXL): Will Starboard Value Push For Sale?

Jeffrey Smith‘s Starboard Value has found its latest activist target in PAREXEL International Corporation (NASDAQ:PRXL), a company that provides consulting and other services to the biopharmaceutical industry. A 13D filing with the SEC yesterday revealed that the activist fund has taken a 5.7% stake in the company, consisting of just under 2.88 million shares.

In the filing, Starboard called PAREXEL’s shares “substantially undervalued” and that they represented an attractive investment opportunity. However, for those interested in mimicking the activist’s investment, it should be noted that while the filing was not released until yesterday, Starboard had actually built its position by May 2 and shares have already jumped by over 15% since then.

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The timing of Starboard’s activist involvement comes at the height of takeover rumors surrounding PAREXEL International Corporation (NASDAQ:PRXL), and the fund referenced those rumors in its filing, saying that it believes a potential sale would attract significant interest. Given shares’ recent rally however, it’s unclear how much of a premium would exist in the event of a sale. Jefferies analyst David Windley suggested this week that a deal for the company would likely be valued at around $80 per share based on past transactions for other contract research organizations (CROs), which would amount to just a 5% premium. However, Windley also suggested that a merger was the best way to “fix” the company.

However, Starboard also believes there is substantial room for improvement in the company’s operating margins should a sale not materialize or prove feasible. PAREXEL already took a big step in that regard on May 4, when an SEC filing of its own revealed that it planned to cut 1,100 to 1,200 jobs as part of its continued restructuring efforts, which it anticipates completing by the end of its 2018 fiscal year.

Starboard’s filing also revealed that it has retained the consulting services of D. Jamie Macdonald, the former CEO of another CRO, INC Research, which was just in the news itself for its own merger with InVentiv Health. The filing cited Mr. Macdonald’s efforts to significantly improve Quintiles’ operating margins while he was the SVP and Head of Global Project Management with that company.

It will be interesting to see the approach that Starboard takes given the potentially limited spread on a sale (at least based on current share prices) coupled with the fact that improving the company’s operational efficiency may prove challenging. Will the fund take aim at the company’s longtime leadership, which has been criticized by other shareholders? Only time will tell.

22 hedge funds in our database were long PAREXEL International Corporation (NASDAQ:PRXL) at the end of 2016, owning 12.9% of the CRO’s shares.

Disclosure: None