Hawkins departure indicates shift in strategy

When Medtronic Inc. (NYSE:MDT) CEO Art Collins retired in 2007, there were at least two candidates vying to replace him.

One was Michael DeMane, the brash president of Fridley, Minn.-based medical device giant’s spine business whose aggressive pursuit of growth invited legal and regulatory scrutiny. The other was chief operating officer Bill Hawkins, a steady, stabilizing presence within Medtronic’s senior leadership team.

The COO ultimately prevailed. Yet Medtronic said Monday that Hawkins will retire in April 2011, less than five years after assuming the top job. Given Hawkins’ relatively short tenure as CEO — Collins served six years, William George ten years — the announcement surprised analysts though some believed the move was necessary.

“Today’s news from Medtronic is surprising … in terms of timing, but thematically in line with our expectations and an encouraging signal of the Board’s desire for accelerated value generation,” Morgan Stanley analyst David Lewis wrote in a research note.

“We expect investors to view this announcement as indicative that a focus on cash flow is likely to become more acute, and this should support positive price movements as a signal of focus on shareholder returns and operational adaptation to the new operating environment,” Lewis wrote.

Hawkins was regarded by most as a smart and capable leader. Under his leadership, Medtronic reorganized its businesses under his “One Medtronic” initiative, expanded overseas and made several “tuck-in” acquisitions. But Hawkins’ efforts went largely unrewarded on Wall Street.

Since August 2007, the month Hawkins became CEO, Medtronic shares have fallen 30 percent to $37 from $53, though that period also includes the worst economic recession in American history since the Great Depression.

But Medtronic also was hampered by operational missteps, including the Sprint Fidelis debacle and continued problems in its spine business. Medtronic has downgraded its 2011 profit forecast twice this year.

But Medtronic also faces a vastly different industry than in the days of Collins and George. Its core pacemaker and implantable cardioverter defibrillator businesses no longer are growth drivers. Healthcare reform — financed in part by a $20 billion tax on medical device makers — has made Medtronic’s long-term business prospects less certain.

“Hawkins became CEO at a very difficult time for Medtronic, and he will be leaving at a very difficult time for Medtronic,” said Joseph Galatowitsch, president and managing partner for Dymedex Consulting in Woodbury, Minn.

Medtronic is transitioning from a high-growth, double-digit growth engine to a more mature business where mid-to-high single digits are the norm, Galatowitsch said.

In response, Medtronic under Hawkins made several small to mid-sized acquisitions. Over the past two years, the company has purchased nine companies: $700 million for CoreValve Inc.; $370 million for ATS Medical Inc.; $123 million for Osteotech Inc., to name a few.

But Hawkins’ “tuck-in” acquisitions never caught fire with Wall Street. In the end, one has to wonder if Hawkins’ inherent caution contributed to his departure. In an industry ripe for consolidation, Medtronic had the cash but not the nerve to pursue big deals.

Who will replace Hawkins and what will their acquisition strategy be? Medtronic said it would pursue a candidate outside of the company — a strong indication it wants new blood to recharge its businesses. George, Collins and Hawkins all were Medtronic executives before the company tapped them for CEO.

In short, Medtronic wants bold leadership. And perhaps nothing says bold more than an industry-changing acquisition or two.

“We are very encouraged the company is so focused on looking externally as we believe external expertise could be helpful given the challenges Medtronic is facing,” Lewis wrote. “We would not be surprised to see additional changes and strategic disruption over the next 12 months given the likely transition to an external candidate could carry an expectation for meaningful changes to strategy and opens the door to additional management changes, acquisitions and divestitures.”

Hawkins might have been the right CEO in 2007, but pressures from both inside and outside the company may have necessitated new leadership for the company for the future.

On the same day of the announcement of Hawkins’ forthcoming exit, Medtronic announced that one of its former CEOs had died.

Winston Wallin, who lead Medtronic from 1985 to 1991, died Monday at age 84. A former president and chief operating officer at Pillsbury Co., Wallin joined Medtronic as a board member in 1978 and was named CEO seven years later.

“We are saddened to learn of Win’s passing, and our thoughts and prayers are with the Wallin family as they grieve the loss and celebrate the life of a dedicated family man and community leader,” Hawkins said in a statement.

“Win’s legacy is part of the very heart of Medtronic,” he said. “Without his contributions, Medtronic would not be what it is today. We are grateful for the opportunity to remember his leadership at Medtronic with pride, and we are inspired to carry out our Mission with the same devotion and passion that he did.”

In retirement, Wallin was an active philanthropist. He founded Wallin Education Partners, an integral partner to the Medtronic Foundation’s Scholars program. Since 1991, the program has awarded more than 3,000 scholarships and more than $25 million to support high-potential students with financial need from Minneapolis, Anoka-Hennepin, St. Paul and North Metro district high schools.

Earlier this year, the University of Minnesota named its new medical biosciences building, a key facility in the school’s $292 million Biomedical Discovery District, after Wallin and his wife Maxine.

“We fondly remember Win for much more than his business record,” Hawkins said. “He was extraordinarily generous and kind, and had a sincerity and dedication to fairness and ethical business practices which we strive to uphold every day at Medtronic.”

To listen to a November podcast with Medtronic CEO Bill Hawkins, click here.