JANA's Rosenstein Casts Walgreens Turnaround as Model for Qualcomm

NEW YORK ( TheStreet) -- Behind Walgreens Boots Alliance's ( WBA) 11% gain this year is a valuable story for investors looking for the next likely target of activist investors.

The drugstore chain's turnaround after years of lagging competitors followed pressure from hedge fund JANA Partners, which began acquiring a stake in predecessor Walgreen Co. in the spring of 2014. JANA eventually took three seats on the company's board, one for managing partner Barry Rosenstein, after Walgreens agreed in September to complete its purchase of Switzerland-based Alliance Boots.

The giant drug retailer has since thrived, primarily because of the "power of bringing a shareholder's mindset into the boardroom," Rosenstein said at an investment conference this month in New York. That compares with the four years before the deal was completed, in which Walgreens lagged both Rite Aid (RAD)and CVS  (CVS)

Rosenstein, who now wants to duplicate Jana's success with Walgreens at semiconductor and telecommunications business Qualcomm (QCOM), said the key to finding a target is looking for inflated organizational structures with room to cut costs. JANA holds a $2 billion stake in the San Diego-based business, which has dipped 14% in the past 12 months.

It's a prime situation for shareholders to step in and boost earnings, Rosenstein said. Indeed, Qualcomm has already mapped out plans to cut costs and authorized a share repurchase of $15 billion in 2015, the company said in an April regulatory filing.

"Our conversations thus far with the company have been very constructive," Rosenstein said. "They recognize the need to take action. In addition, we believe there is an attractive fundamental story here that is being overlooked by the market."

At Walgreens, JANA controlled 14% of the stock held by directors when the merger was completed in December. That was second only to the 84% held by its largest shareholder and acting CEO Stefano Pessina, who took over after serving as executive chairman of Alliance Boots.

Prior to the acquisition of Alliance, Rosenstein said, Walgreens' stores had 12 layers between the CEO and store managers, versus an average of five at its retail competitors. 

Once Pessina took over, he immediately cut costs, reshuffled the board to add members with experience in widening profit margins, and reorganized stores' management and distribution systems, which had been a glaring problem, Rosenstein said. 

Walgreens' margins were "approximately a third lower than CVS margins, and as much as half those of its global peers," Rosenstein said at the annual Sohn conference last week. "The company had failed to adapt to changes in the U.S. retail landscape. Walgreens also failed to respond to changes in the U.S. healthcare system. As a result, the company routinely missed analyst expectations."

Indeed, Walgreens earnings lagged behind estimates five times in the three years through the end of 2014. In the most recent report, though, the company topped estimates by 24%, the widest margin in the entire period.

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