What happened

After the announcement that it has reached an agreement with an activist investor, shares of Cerner (NASDAQ:CERN), a leading provider of technology to the healthcare industry, rose 12% as of 10:45 a.m. EDT on Tuesday.

So what

Cerner announced that it is making a number of changes to its business practices and board of directors in response to discussions that it has held with Starboard Value. Starboard is an activist investor that owns about 1% of Cerner's stock.

Here are the key terms of the agreement:

  • Four new directors have been appointed to Cerner's board, effective immediately. In addition, an existing director has agreed to retire at the end of his term.
  • The president role has been eliminated.
  • The strategic business unit (SBU) structure has been eliminated.
  • Numerous operations that were formerly spread out across different leaders are now reporting directly to the company's chief operating officer.
  • A new dividend has been initiated.
  • The stock-buyback authorization has been increased by $1.2 billion. The company now has the green light to buy back $1.5 billion of its common stock.
  • Executives' variable compensation is now linked to free cash flow generation.
  • A targeted adjusted operating margin of 20% has been set for the fourth quarter of 2019. This number jumps to 22.5% by the fourth quarter of 2020.
  • A new finance and strategy committee of the board has been created to oversee these improvements.
  • A consulting firm named AlixPartners has been hired to conduct a detailed review of the company's operations and cost structure.

Here's the commentary that Cerner's CEO, Brent Shafer, shared with investors:

Since assuming the role of Chief Executive Officer in 2018, I, along with our entire Board and leadership team, have been reviewing Cerner's operational and financial performance to identify opportunities to unlock the Company's significant potential. We are focused on effectively implementing a refined operating model to improve efficiency and profitability, while also innovating at scale for our clients and preparing Cerner for its next phase of growth and shareholder value creation. We are committed to delivering significant operating margin improvement and returning capital to our shareholders, while maintaining an unwavering focus on delivering value to our clients.

Traders are applauding the terms of the agreement.

Businessmen looking over a contract.

Image source: Getty Images.

Now what

Cerner's stock has lagged the returns of the S&P 500 over the last five years, so it is understandable why the company has been so open to working with an activist investor to get the business back on track.

If the company can achieve its new targets, it is likely that its earnings per share will grow at a much faster rate over the next five years than the 9% that Wall Street is currently predicting. If that's true, then Cerner's long-term shareholders might finally be being rewarded for their patience.