When you plan to acquire a company with the name St. Jude’s in it, you’d think the deal has to be blessed.
Maybe, maybe not.
The buyer, Abbott Laboratories (ABT), thinks the health care giant’s $25 billion cash-and-stock purchase of medical device maker St. Jude’s Medical (STJ) is a home run.
"Bringing together these two great companies will create a premier medical device business and Immediately advance Abbott's strategic and competitive position," Abbott Chairman and CEO Miles D. White said in a company news release.
Abbott believes St. Jude’s strong positions in heart failure devices, atrial fibrillation and cardiac rhythm management mesh ideally with its coronary intervention and transcatheter mitral repair businesses. Investors might be enticed by the fact that the combined companies will be formidable competitors in every area of the large and fast-growing market for cardiovascular devices.
Morningstar analyst Debbie Wang agrees the deal is just what the doctor ordered. Her research note said Abbott lacked "heft" in its product portfolio as well as "depth of innovation.” Evidently those holes have been filled.
Investors have been less enthusiastic about the marriage. On the day of the announcement, Abbott’s shares retreated more than $3.40 and have since slid over 8% to $37.39. During the same period, both the S&P 500 and the Dow are up slightly.
St.Jude’s was Abbott’s second big buy in in three months. In February the company agreed to purchase point-of-care diagnostic company Alere (ALR) for $56 a share, or $5.8 billion, enabling it to offer “the best and broadest diagnostic solutions,” White said.
But on the same day as the St. Jude’s announcement, Alere said Abbott wanted to back out of the deal, offering to pay Alere $35 million to $50 million to go away. Alere said, sorry, a deal’s a deal. But maybe not. Investors seem skeptical the marriage will be consummated. Why else would Alere be trading at just over $42?
Moody’s is also unhappy about Abbott’s buying spree. The credit ratings agency indicated it’s likely to downgrade the company’s credit rating if it goes ahead with the two acquisitions because it would triple Abbott’s debt.
Despite the uncertainties hanging over Abbott’s head, some think the stock is undervalued and the St. Jude’s acquisition is a nice shot in the arm.
At the same time, competitors in the cardiovascular space are unlikely to sit still. Device makers like Johnson & Johnson (JNJ) Edwards Lifesciences Corp. (EW), Boston Scientific Corp. (BSX) and Medtronic plc (MDT) might be on the prowl for acquisitions of their own.
Given the potential to earn a nice premium, investors might want to look at two targets that are easily digestible: Cardiovascular Systems (CSII) and HeartWare International Inc. (HTWR), both with market capitalizations in the range of $550 million.
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