Activist Investing: Unlocking Avantor’s Hidden Value

Have you ever wondered what happens when a company with massive potential stumbles, leaving investors frustrated and stock prices languishing? That’s exactly the story unfolding at Avantor, a life sciences giant that’s caught the eye of activist investor Engine Capital. With a bold plan to shake things up, they’re pushing for changes that could unlock billions in value. I’ve seen companies like this before—brimming with opportunity but held back by missteps. Let’s dive into why Avantor’s in this mess and how Engine Capital’s strategy could turn the tide.

Why Avantor’s Struggles Demand Attention

Avantor isn’t just any company—it’s a powerhouse in the life sciences tools industry, supplying critical products to biopharma, healthcare, and advanced tech sectors. Think ultra-pure chemicals, lab equipment, and even specialized silicones for medical use. With two key segments—Laboratory Solutions (LSS) and Bioscience Production (BPS)—Avantor is a global leader. Yet, despite its market dominance, the company’s stock has plummeted, losing over 50% of its value in just a few years. How does a company with such promise end up here?

The answer lies in a series of self-inflicted wounds. Poor leadership decisions, a convoluted organizational structure, and questionable capital allocation have eroded investor confidence. But here’s the kicker: Engine Capital, with a roughly 3% stake, believes Avantor can rebound—and they’ve got a plan to make it happen. In my view, their approach feels like a wake-up call for a company that’s been coasting on its reputation for too long.

The Root of Avantor’s Challenges

Let’s break down the mess. Avantor’s troubles stem from a combination of leadership turnover, operational inefficiencies, and disastrous acquisition decisions. Over the past three years, the company has cycled through its CEO, CFO, and leaders of both its LSS and BPS segments. This kind of instability screams dysfunction, and it’s no surprise that decision-making has suffered. A complex matrix organizational structure hasn’t helped, creating confusion and a lack of accountability among teams.

Then there’s the issue of capital allocation. During the pandemic, Avantor went on a spending spree, shelling out $3.8 billion to acquire companies like Ritter, Masterflex, and RIM Bio—at sky-high valuations. These deals, made when life sciences businesses were trading at inflated multiples, have cost shareholders dearly. By my estimate, Avantor lost over $2.4 billion in value on these acquisitions alone. That’s not just a misstep; it’s a financial catastrophe.

Poor capital allocation can destroy shareholder value faster than any market downturn.

– Financial analyst

Perhaps the most jaw-dropping moment came in 2023, when Avantor’s board turned down a potential acquisition offer from Ingersoll Rand. The deal, reportedly valued at $25–$28 per share, would have given shareholders a 20–35% premium. Today, Avantor’s stock hovers around $13. That decision alone raises serious questions about the board’s judgment. Could Engine Capital’s intervention finally force the accountability Avantor so desperately needs?

Engine Capital’s Blueprint for Change

Engine Capital isn’t just pointing fingers—they’ve laid out a clear, multipronged strategy to get Avantor back on track. Their plan focuses on five key areas, each designed to address the company’s core issues and unlock its hidden value. Here’s what they’re proposing:

• Boost operational excellence: Streamline processes to improve efficiency and profitability.
• Drive organic growth: Focus on core strengths to regain market share, especially in the LSS segment.
• Cut costs aggressively: Reduce overhead and eliminate wasteful spending.
• Optimize the portfolio: Divest non-core assets and simplify the product lineup.
• Refresh the board: Bring in new directors with expertise in leadership and capital allocation.

This isn’t just a wish list—it’s a roadmap. Engine Capital estimates that if Avantor executes these changes effectively, the stock could climb to $22–$26 by 2027. That’s a bold prediction, but is it realistic? Let’s dig into each piece of their plan to see how it could play out.

Streamlining for Success: Operational Excellence

Avantor’s Laboratory Solutions segment, which accounts for 67% of revenue, has been a weak link. It’s one of the top three life sciences distributors globally, yet it’s bleeding market share to competitors like Thermo Fisher and Merck KGaA. Why? Inefficiencies in its supply chain and a bloated product catalog. Engine Capital points out that Avantor manages 6 million stock-keeping units (SKUs), while Thermo Fisher’s comparable segment handles less than half that number for similar revenue.

By trimming SKUs and focusing on high-margin products, Avantor could improve inventory turns, secure better supplier rebates, and boost profitability. It’s a no-brainer, but it requires discipline—something Avantor has lacked. I’ve seen companies turn around by simplifying their operations, and Avantor could be next if they get this right.

Reigniting Growth in a Competitive Market

Growth isn’t just about cutting costs—it’s about winning back customers. The Bioscience Production segment, which supplies high-purity materials like medical-grade silicones, has potential but is hampered by underutilized facilities. Engine Capital suggests optimizing these facilities to increase output and capture more market share. Meanwhile, LSS needs to focus on regaining its competitive edge through targeted investments in sales and innovation.

Here’s where I think Engine’s plan shines: they’re not just preaching cost-cutting; they’re pushing for smart growth. In a sector as dynamic as life sciences, standing still isn’t an option. Avantor needs to move fast to reclaim its position as a market leader.

Cost Discipline: A New Mindset

Avantor’s history of reckless spending, particularly on acquisitions, has left it with high debt and low investor confidence. Engine Capital argues that the company should prioritize free cash flow for share repurchasing and debt reduction rather than chasing more M&A deals. This shift in mindset could signal to the market that Avantor is serious about financial discipline.

Interestingly, Avantor has already announced a $400 million cost-cutting initiative. That’s a start, but Engine Capital believes more can be done. For example, reducing overhead in subscale facilities and divesting non-core assets could free up capital for more productive uses. It’s a tough pill to swallow, but sometimes you have to let go of the baggage to move forward.

Cost discipline isn’t about slashing budgets—it’s about spending smarter.

Portfolio Optimization: Less Is More

One of Engine Capital’s most compelling ideas is to streamline Avantor’s portfolio. The company’s sprawling operations include assets that may be more valuable to competitors. For instance, some of the facilities acquired during Avantor’s buying spree could be sold off to reduce debt and sharpen focus. Similarly, subscale facilities in smaller markets might fetch a premium from strategic buyers.

Then there’s the possibility of splitting Avantor into two separate entities: LSS and BPS. Each business has distinct strengths and could command higher valuations as standalone companies. For context, when Avantor acquired VWR (now part of LSS), it was valued at 12x EBITDA. BPS peers trade at a median of 17x EBITDA, while Avantor as a whole languishes at 8x. Separating these businesses could unlock significant value, but it’s a bold move that requires careful execution.

Board Refresh: Time for New Blood

Perhaps the most critical piece of Engine Capital’s plan is a call to refresh Avantor’s board. The current board, led by chairman Jonathan Peacock, has overseen years of underperformance and questionable decisions. Engine Capital wants new directors with expertise in capital allocation, distribution, and executive leadership to steer the company in a new direction.

I can’t help but agree here. A board that rejected a lucrative acquisition offer and failed to address ongoing leadership turmoil needs a shake-up. Fresh perspectives could bring the accountability and vision Avantor desperately needs. Plus, it sends a signal to investors that the company is serious about change.

Aligning Incentives with Shareholders

Another sore spot is executive compensation. In 2024, despite a 2% revenue decline and a 7% drop in share price, Avantor’s CEO received 110% of his target bonus. That’s a disconnect that frustrates investors. Engine Capital is pushing for compensation structures that tie rewards directly to shareholder value creation. It’s a simple principle: if the stock suffers, so should the C-suite.

This issue hits close to home for me. I’ve seen too many companies reward executives for mediocre performance while shareholders bear the brunt. Aligning incentives isn’t just about fairness—it’s about motivating leaders to prioritize long-term success.

The Nuclear Option: Selling Avantor

If Avantor can’t turn things around on its own, Engine Capital has a backup plan: sell the company. Private equity firms like New Mountain Capital, which still holds a 2% stake, could be interested. Strategic buyers, like Ingersoll Rand, might also re-enter the picture, especially at today’s discounted valuation. Engine estimates a sale could fetch $17–$19 per share—a significant premium over the current price.

Is a sale the best path? It depends. A standalone turnaround could yield higher returns if executed well, but a sale offers a quicker, less risky way to unlock value. Either way, Engine Capital’s involvement ensures that Avantor’s board can’t ignore the pressure much longer.

Can Avantor Deliver by 2027?

Engine Capital’s timeline—reaching $22–$26 per share by 2027—is ambitious. Turning around a company with declining revenue, shrinking margins, and a history of mismanagement isn’t a quick fix. The new CEO, set to start soon, will face a steep challenge. Plus, the director nomination window doesn’t open until January, which could delay board changes.

That said, the pieces are in place for a potential turnaround. The $400 million cost-cutting plan is a step in the right direction, and Engine Capital’s pressure could keep the board focused. Still, I’m skeptical about the timeline. Major overhauls like this often take longer than two years, especially when trust in leadership is shaky.

Transformation takes time, but the right strategy can move mountains.

What Investors Should Watch For

If you’re an investor, here’s what to keep an eye on:

1. Leadership changes: Will the new CEO bring the vision and discipline Avantor needs?
2. Cost-cutting progress: Can Avantor deliver on its $400 million savings goal?
3. Portfolio moves: Will the company divest non-core assets or split its segments?
4. Board refresh: Does the board add new directors with the right expertise?
5. Market response: Will Engine Capital’s involvement boost investor confidence?

These milestones will determine whether Avantor can climb out of its slump or if a sale becomes the better option. Either way, Engine Capital’s activism is a catalyst that could reshape the company’s future.

The Bigger Picture: Activism’s Role in Value Creation

Avantor’s story isn’t just about one company—it’s a case study in how activist investing can drive change. When companies lose their way, activists like Engine Capital step in to hold boards accountable and push for strategies that benefit shareholders. It’s not always pretty, but it’s often necessary. In my experience, activism can be the spark that turns a struggling company into a success story.

Will Avantor rise to the challenge? Only time will tell, but one thing’s clear: Engine Capital’s plan has put the company on notice. For investors, this is a story worth watching closely.

Avantor’s Turnaround Formula:
  40% Operational Efficiency
  30% Strategic Divestitures
  20% Leadership Accountability
  10% Market Confidence