Jim Tobin is leaving the executive suite at Boston Scientific Corp. after a controversial 10-year run at the helm of the Natick-based devices leviathan.
The company named former Zimmer Holdings Inc. head Ray Elliott to succeed Tobin as president and CEO, effective July 13.
Tobin, who will turn 65 in a few weeks, said he’s always viewed 10 years as the natural lifespan for any chief executive.
“I’ve been here now 10 years. That’s enough. I’ve always believed that 10 years is sort of a natural limit to how long a CEO can expect to be effective,” he told analysts on a conference call. “Beyond that, personally, it’s the right thing too. … This place is like a video game. There’s something happening practically every day.”
He departs with a healthy severance deal worth up to $5 million, according to a filing with the federal Securities and Exchange Commission.
Tobin will draw his $994,000 annual salary until Nov. 30 (which works out to approximately $445,000). He’ll also get 2.5 months of salary for each year of service, a perk worth about $2.1 million, and a “career service award” of 250 percent of his salary from by Boston Scientific’s board (worth roughly $2.5 million) and accelerated vesting of 2.125 million shares of company stock. If he cashed those out today, he’d make about $20 million.
BoSci went through an unprecedented growth surge during his tenure, with annual sales jumping from $2.8 billlion to $8 billion in 2008, peaking at $8.4 billion in 2007. Tobin also led a hiring spree, more than doubling the size of the company from 12,615 employees when he took the helm to a high-water mark of 28,600 in 2006. But cost constraints and mounting debt prompted layoffs for about 4,000 workers over the last two years; at the end of last year, the company employed 24,800 people worldwide.
Boston Scientific was profitable for six of Tobin’s 10 years at the top, but the final three were not kind to the company’s books. BSC posted massive losses in 2006 ($3.5 billion) and again last year ($2 billion).
Mis-steps on the acquisitions trail
A pair of misguided acquisitions didn’t help the company or Tobin personally.
BSC shelled out $27 billion in cash and stock for Guidant Corp. after a bidding war with Johnson & Johnson over the heart device maker.
J&J had a $25 billion deal to purchase the Indianapolis-based firm in late 2004. But a series of product recalls prompted the New Brunswick, N.J.-based medical devices giant to pull out. Guidant sued J&J and the companies settled on a $21 billion price tag.
Boston Scientific swooped in shortly after with a $25 billion opening salvo in December 2005, eventually winning the dubious prize of paying $80 per share for Guidant ($42 in cash and $38 in stock). The buyout marked a victory over one of its arch rivals, but the bidding war helped drive up the cost significantly, including a $705 million break-up fee to J&J for killing the initial deal.
Despite its promise, the deal quickly soured. After its May 2006 closing, BSC was forced to issue recalls or warnings on about 50,000 Guidant defibrillators, reporting that it might take two years to clean up the mess in Indianapolis.
Fortune magazine called it the “second-worst” merger of all time, trailing only the ill-fated Time Warner-AOL merger.
The BoSci-Guidant merger was crippling in many ways, from public relations to the balance sheet. The deal saddled BSC with a massive, nearly $9 billion nut of debt, which it steadily paid down to just over $6.7 billion at the end of 2008.
The debt helped prompt downgrades by all three major bond rating agencies to junk bond status, an embarrassing and painful defeat for stockholders. Nicholas and Abele’s capital injections fueled upgrades over the last few months, but Boston Scientific is still, as they say on Wall Street, a fallen angel.
The Guidant deal also carried a major price tag for Tobin, who had $14 million coming to him if Boston Scientific’s stock hit $35 per share and $150 million if it reached $75, according to Fortune. But those milestones were never reached, as share prices dropped steadily from $25 at the end of 2005 to its $9.50 opening today.
Another deal goes south
Tobin was also at the helm when another merger went sour.
In June 2004, Boston Scientific spent $740 million on Advanced Bionics, the brainchild of celebrated inventor Alfred Mann.
The Valencia, Calif.-based company was developing cochlear implants for people with profound hearing loss and a spinal cord neuro-stimulator that was making waves in the pain management arena. At the time of the merger, Advanced Bionics was posting roughly $50 million in annual sales.
When the companies cut the deal, Mann was told he could stay at the helm in Valencia; sweeteners built into the contract would have boosted the possible acquisition price to nearly $4 billion if Advanced Bionics reached $1 billion in annual sales in 10 years.
Officials at Boston Scientific were bullish on the possibilities, telling analysts that Advanced Bionic sales could reach nearly $4 billion by 2010.
But just two years after the merger, Tobin told Mann that his services were no longer required. Mann balked, accusing Boston Scientific of plotting behind his back, and sued. He eventually settled for a portion of the company he founded.
All told, Boston Scientific paid former shareholders of Advanced Bionics $650 million, making the final, $500 million installment in March. AB shareholders in turn paid Boston Scientific $150 million to buy back its auditory business.
Despite the mis-steps, Tobin won a sweetener last year with nearly $17 million worth of stock, which will vest over the next four years, his first equity grant in two years. Watson Wyatt, the company’s new compensation consultants, said he needed the boost as an incentive and to “promote stockholder alignment.”
The new (old) kid on the block
Tobin leaves Elliott, whom he called “an outstanding choice,” a business that generates $100 million in cash each month.
That’s likely sweet music to Elliott, who told analysts on the conference call that he’s “fanatical about cash and sales flow.”
“Nothing really happens in business until you sell something and collect the money for it,” he said.
Elliott, 59, has more than 35 years of healthcare industry experience under his belt. He led Zimmer for 10 years, joining as president and adding chairman and CEO in due course. He also did a stint as president and CEO of Cybex International Inc., a medical rehabilitation and cardiovascular products maker, and was president and chairman of various divisions of communications firm Southam Inc. and group president of the food and beverage company John Labatt Ltd. He he got his start in healthcare with a 15-year run at American Hospital Supply Corp. (now Baxter International Inc.) in sales, marketing, operations, business development and general management jobs.
At Zimmer, Elliott oversaw a quadrupling of sales, with revenues rising from about $1 billion in 1997 to roughly $4 billion in 2007. And he took the company public in 2001, with an initial market capitalization of about $5 billion; when he left in 2007, the company’s market cap was more than $20 billion.
And in contrast to Tobin, whom Forbes magazine named one of the “most overpaid” CEOs in business, Elliott earned “Best CEO in America” status from Institutional Investor magazine in 2005.
He’ll earn a base salary of $1.2 million a year at BSC (he’s been pulling down $600,000 a year since June 23 as a senior advisor, money he’ll earn until his July 13 starting date in Natick), plus a $1.5 million signing bonus, according to the SEC filing.
In his first 100 days on the job, Elliott said he plans to make quality his primary focus.
“This subject is sacred,” he said. “There will be no tolerance for compromises.”
And he evidently expects to be more successful on the mergers front, calling current conditions a “target-rich environment” for acquisitions.
Elliott said stockholders and analysts can expect an “open, unvarnished” manner from Boston Scientific’s new leader, and listed his two core beliefs as “The team with the best people wins” and “In each company there can only be one team and one dream.”
“We win or lose together,” he said.