Safeskin Bailed Out (Fool Plate Special) November 18, 1999

An Investment Opinion

Safeskin Bailed Out

By Brian Graney (TMF Panic)
November 18, 1999

For stock market hero turned goat Safeskin Corp. (Nasdaq: SFSK), yesterday will go down in the firm's tumultuous history as "exit strategy day." After the close, tissue, personal care, and healthcare products giant Kimberly-Clark (NYSE: KMB) agreed to acquire the troubled maker of powder-free exam gloves in a stock swap valued at $850 million, which includes about $155 million in assumed debt and outstanding stock options.

The price tag values Safeskin's shares at $13.35 a piece based on Kimberly-Clark's closing price yesterday. That works out to a fairly decent 23% premium to Safeskin's recent price of $10 13/16 per share, but a 12% discount to the firm's share price on March 11. What was so special about March 11? That was the date that preceded "shareholder value destruction day," when a massive earnings and sales warning led to a 41% plunge in the company's share price. In the eight months since that infamous day, Safeskin's stock has regained a bit of the lost ground, but the firm's reputation with investors has remained as soiled as a used surgeon's glove.

Safeskin's blowup earlier this year -- which was the subject of a meaty March Fool on the Hill column linked at the bottom of this page -- was a classic example of balance sheet red flags serving as leading indicators of trouble to come. Mis-estimated demand and distributor inventory levels by management (numerous class action-minded law firms allege the figures were not mis-estimated, but purposely misstated) finally came to light in a big way with the March warning, months after a sell-side analyst first brought the potential problems to everyone's attention.

For most of this year, investors have been bailing out of the stock, which had previously racked up an amazing 73% compounded annualized return between its IPO date in November 1993 and its high-water mark in July 1998. In the past few quarters, sales growth has dried up and margins have been eroded as the company has tried to work through pricing pressures and overcapacity problems.

The overcapacity dilemma is especially ironic for longtime Safeskin followers, considering the company often complained during its go-go growth days that it couldn't make its gloves fast enough to satisfy seemingly rabid demand from its customers. As recently as September 1998, President and CEO Richard Jaffe had bragged in an interview with The Wall Street Transcript that the company's products were so popular that the firm would possibly never operate in any other environment outside of persistent undercapacity. "We believe that we can sell everything we make this year, next year, and expand the capacity," he said. So much for that theory.

With the staid Kimberly-Clark now running the show, the days of such windy executive talk appear to be over. The current president of Kimberly-Clark's professional healthcare division will take over the reins at Safeskin, which will join recent acquisition Ballard Medical Products in Kimberly-Clark's fast-expanding disposable medical products business. Jaffe will be relegated to serve the role of a consultant, which basically means that he will be shuffled to an office somewhere and will propose business plans that everyone will pretty much ignore.

Despite the considerable baggage associated with the purchase, Kimberly-Clark believes it is getting good value in return for trading away part of its equity for Safeskin. The Dallas-based giant appears to be willing to wave off the legal issues hanging over Safeskin's head and is focusing instead on the cost savings to be reaped and the added market presence it will gain in the medical products area. But that's little consolation to any high-cost basis Safeskin shareholders who have held on to their stock throughout this extended ordeal, who today received closure in the form of some Kimberly-Clark shares and a hard-learned lesson in the risks of equity investing.

Related links:
Fool on the Hill, "Safeskin's Lessons," 03/17/99
Fool Plate Special, "Safeskin Skinned by Downgrade," 10/29/98
Safeskin message board