Potential targets of the medical device and diagnostics giant might
request stricter parameters when structuring a deal, company followers
say.
By Sarah Pringle
With
Abbott Laboratories (ABT) allegedly resisting completing its $7.9 billion deal
for Alere Inc. (ALR), it raises the question of what the effect might be on the
healthcare giant’s reputation from an M&A standpoint, or in other words,
future acquisition attempts.
One
case that could be made is that potential targets might want to think more
carefully before striking a deal with the prolific buyer of diagnostic and
device assets. On Tuesday, Sept. 6, for example, came a deal viewed by some as
a lost opportunity for the Abbott Park, Ill., company.
Cepheid
Inc. (CPHD), a point-of-care molecular testing company and an asset arguably of
better quality than Alere, announced it had signed an agreement to be taken out
by Danaher Corp. (DHR) for $4 billion in cash and debt.
For a
$61.6 billion-market cap company, is fighting the Alere deal worth it even if
the problems facing the target warrant it?
“Abbott
needs to swallow their pride and put their buyer’s remorse to bed and acquire
[Alere] for $56 a share,” Mark Massaro of Canaccord Genuity Inc. said.
“Does [Alere] hurt them? Yes, it absolutely does."
It
was less than a couple of weeks ago that Alere, another provider of
point-of-care diagnostics, revealed it was suing Abbott in the Delaware Court
of Chancery in an effort to push the deal through. The Waltham, Mass., target
is asking Delaware Vice Chancellor Sam Glasscock III for a September trial
date, hoping to resolve the case by the end of the month.
Abbott’s
cash and debt deal for Alere was first announced on Feb. 1 and came just weeks
before it announced a $30.7 billion deal for St. Jude Medical Inc. (STJ) on
April 28.
The
Alere situation likely won’t stop Abbott from pursuing more M&A in the
future because it needs to continue to bulk up — and especially in the devices
space — if it wants to stay competitive, according to Debbie Wang of Morningstar
Inc. Still, what it could imply is that potential acquisition candidates become
more adamant about obtaining tighter parameters such as higher termination fees
so that less risk is borne, she said.
"I
do think that some of the potential targets will probably want to think very
carefully about how any potential deals are structured,” Wang said.
Indeed,
in a redacted version of Alere’s complaint that was made public on Aug. 30, the
target alleged that at a meeting of the two companies’ top executives on April
19, Abbott general counsel Hubert Allen offered Alere $30 million to $50
million to walk from the deal and threatened to find a way out of the
transaction if Alere did not take the offer. According to the complaint, Allen
said that “Abbott might simply run out the clock by failing to secure the
necessary antitrust approvals” by the the drop-dead date. Alere alleged
that the next day Abbott CEO and chairman Miles White said his company
“would make life a ‘living hell for everyone at Alere’” if the
company did not take the offer.
While
comments like these can’t be good for Abbott from a reputation standpoint,
Alere is a unique situation. To be fair, a company set to be acquired by Abbott
that has nothing to hide probably wouldn’t be too worried about the former
pulling out.
From
Abbott’s standpoint, the Alere situation might also behoove management to think
more carefully about what targets they go after and what sort of value could be
derived, Wang added. Indeed, investors from the beginning have been wary about
Abbott’s play for Alere, “even before all the skeletons began falling out
of the closet,” Wang said.
Sunnyvale,
Calif.-headquartered Cepheid, another provider of point-of-care diagnostics,
arguably would have been a better play for Abbott.
While
Cepheid has run into its own set of obstacles — having seen its stock tumble over
the past year alongside delays in its GeneXpert Omni device and hyped up
expectations amid a third CFO in less than two years — they aren’t comparable to
those that continue to weigh on Alere.
Alere,
on the other hand, has since early March faced a U.S. Department of Justice
probe centered around whether it broke foreign bribery laws. Abbott had hoped
to end the Alere deal in light of the ongoing government investigation and amid
concerns about the delayed filing of its 2015 Form 10-K.
“Frankly,
I don’t know why Abbott didn’t acquire Cepheid when they had the chance,”
Massaro said. “The reality was that Cepheid is and was a much better
company than Alere.”
Hypothetically
speaking, if Abbott, which many previously thought would ultimately buy
Cepheid, threw in a rival bid of $55 a share — north of the $53 per share price
in the Danaher deal — the target’s CEO, John L. Bishop, likely would brush it
off, Massaro said.
Abbott’s
pending acquisition of Alere isn’t alone in drawing controversy for the
acquirer.
In
late August, short-seller Muddy Waters LLC attacked St. Jude, asserting its
implanted heart devices were susceptible to cyberattacks. The firm’s director
of research, Carson Block, alleged “there is a strong possibility that
close to half of STJ’s revenue is about to disappear for approximately two
years.”
The
device maker’s CEO and president, Michael Rousseau, in two separate statements
refuted the accusations, describing the claims as “irresponsible,
misleading and unnecessarily frightening patients.”
Assuming
the successful completion of the St. Jude deal, Abbott will significantly up
its standing from a cardiac devices standpoint.
Its
future M&A efforts, therefore, might be aimed in the orthopedic area,
including a spinal treatment device company or a manufacturer of minimally
invasive products that players such as a Boston Scientific Corp. (BSX) or C R.
Bard Inc. (BCR) already make, Wang noted. Though it already encompasses a
diabetes business, Abbott might also think about purchasing a pump technology
company that would enhance existing operations, she added.
Abbott
and Alere representative did not immediately return requests for comment.
— David
Marcus contributed to this report.