By Amanda Pedersen, Senior Staff Writer
Medical Device Daily reported on only 14 mergers and acquisitions in the fourth quarter of 2014 in which the amount was publicly disclosed in U.S. dollars, but together these deals totaled $19.5 billion. By comparison, there were nearly twice as many deals (24) reported on during the fourth quarter of 2013, but those deals only totaled about $14.4 billion. Going back even further, there were 39 deals reported or closed on during the fourth quarter of 2012, which totaled about $16.6 billion. The trend suggests that medical device and diagnostic companies are doing fewer, but more valuable deals.
The industry continued to see mega-deals last quarter, specifically with Becton Dickinson's (BD; Franklin, Lakes) $12.2 billion CareFusion (San Diego) purchase in October (Medical Device Daily, Oct. 7, 2014). Other deals that broke the billion-dollar mark last quarter included Wright Medical's (Memphis, Tennessee) $3.3 billion acquisition of Tornier (Schiedam, the Netherlands) later that same month (MDD, Oct. 29, 2014) and Steris (Mentor, Ohio) $1.9 billion purchase of Synergy Health (Swindon, UK), also reported in October (MDD, Oct. 14, 2014). The later two deals represented the controversial inversion trend.
Here's a closer look at some of the stand-out deals of last quarter:
Becton Dickinson joined a club of multi-billion-dollar spenders in 2014 with its fourth quarter report that it would buy CareFusion for $58 a share in cash and stock, or a total of $12.2 billion.
The combination of the two companies' product portfolios will offer integrated medication management solutions and smart devices, from drug preparation in the pharmacy, to dispensing on the hospital floor, administration to the patient, and subsequent monitoring. The combination will improve the quality of patient care and reduce healthcare costs by addressing unmet needs in hospitals, hospital pharmacies and alternate sites of care to increase efficiencies, reduce medication administration errors and improve patient and healthcare worker safety. In addition, BD will have solid positions in patient safety to maximize outcomes in infection prevention, respiratory care, and acute care procedural effectiveness.
"This acquisition accelerates our strategy and is highly aligned with one of BD's key areas of focus – enabling safer, simpler and more effective drug-delivery," Vincent Forlenza, BD's chariman/president/CEO, said during an October conference call. "The combination of the two companies will further enable us to deliver end to end solutions from drug preparation through dispensing and administration that increases efficiencies, reduces medication errors and improves patient safety in both hospitals and pharmacies."
He added that the transaction also creates unique growth opportunities internationally, particularly in emerging markets.
The transaction is expected to provide double-digit cash EPS accretion to BD in the first full year, and is also expected to be accretive to GAAP EPS in fiscal year 2018. The transaction is also expected to expand EBITDA margins, and deliver strong cash flow generation and ROIC. The company said it has identified $250 million of pre-tax cost synergies. These savings are expected to be fully realized in fiscal year 2018, resulting from reduced overhead expenses and efficiencies from the combined operational and manufacturing footprint. The estimate excludes any benefit from potential revenue synergies resulting from the combination of the two organizations.
"The deal demonstrates to us that management is placing a bigger bet on its medical business (relative to its diagnostics franchise), specifically in medication management and patient safety," Mark Massaro, an analyst with Cannaccord Genuity said. "We view the deal favorably as CareFusion is synergistic with BD's drug management/safety business. BD will help expand CareFusion's products globally, especially in emerging markets, to form a global leader in medication management and patient safety."
Wright Medical's merger with Tornier will create a new company valued at $3.3 billion in a tax inversion deal. The legal address for the new company, to be called Wright Medical Group NV, will be in the Netherlands, where Tornier has been based for about eight years, the companies said in a statement. The company said its U.S. headquarters will remain in Tennessee.
"This combination will create the premier extremities-biologics company with a broad global reach," said Robert Palmisano, Wright's president/CEO. "Together, we will have one of the most comprehensive upper and lower extremity product portfolios in the market."
The deal provides a 28% premium for Tornier's shareholders compared with the company's closing price of $23.59 on Oct. 24.
The deal makes sense for both companies, according to Wells Fargo Securities analyst Larry Biegelsen. "The combination of Wright and Tornier creates a high-growth extremities company that will have a comprehensive product portfolio across upper and lower extremities. Tornier generates roughly 60% of its revenue from upper extremities, while Wright generates about 60% of its revenue from lower extremities," Biegelsen wrote in a research note.
Management expects the combined company to grow revenue in the mid-teens, despite $25 million to $30 million in revenue dis-synergies in the first 18 months. The companies expect $40 million to $45 million of cost synergies realized by year three post-acquisition.
The transaction is expected to close in the first half of 2015, the companies said.
Steris also jumped on the tax inversion bandwagon last quarter with its offer to buy Synergy Health for about $1.9 billion in cash and stock. Steris said it plans to set up a new UK company to undertake the acquisition, which would cut its tax bill.
But the company was quick to try to de-emphasize the tax benefits of the deal.
"Our clear intention is that the combination of our businesses will catalyze growth in both our businesses, share experience, and utilize each other's knowledge and skills," Steris CEO Walt Rosebrough said during a conference call.
The deal is expected to be completed by March 31. The new company is expected to have an effective tax rate of about 25% beginning in the fiscal year starting April 1. Steris' effective tax rate for 2013/14 was 31.3%.
The inversion trend drew fire throughout the year from some U.S. politicians and regulators, resulting in a crack down by the U.S. Treasury in September. The U.S. Treasury announced new rules to help close what Treasury Secretary Jacob Lew called a "glaring loophole" in the U.S. tax code, in which U.S. companies acquire foreign businesses and then switch their citizenship to avoid playing U.S. taxes. Critics of the new treasury rules argue that policy makers should instead overhaul corporate taxes to deter inversions.
Still, Rosebrough said the tax rates that Steris is anticipating conforms to the current law and regulations and that the drop to 25% is fairly normal for international companies. "Clearly we're not typically users of aggressive postures, we're not using a number of the techniques that the Treasury Department has described as things that they would naturally attack," he said.
Rosebrough also said that the two companies have discussed a possible merger for years and that the conversations were "philosophical and strategic" rather than number-oriented.
As the fourth quarter came to an end, rumors buzzed about a potential merger between Stryker (Kalamazoo, Michigan) and Smith & Nephew (S&N; London). According to a report from Bloomberg, which cited people familiar with the matter, Stryker plans to offer a significant premium to Smith & Nephew's current share price, with one source saying it could be about 30%.
Analyst reactions to the idea of Stryker buying S&N have been mixed. The J.P. Morgan Research team led by Mike Weinstein noted in its 2015 Top Picks report that Stryker has the potential to be a consolidator, and that "we view a Smith & Nephew transaction as the right move for shareholders and necessary for Stryker to drive margin expansion."
David Lewis of Morgan Stanley took the opposite viewpoint during his annual outlook call (MDD, Jan. 6, 2015). "We are not convinced that this is the deal that Stryker should be doing," Lewis said.
Lewis said a Stryker-S&N deal would represent a "pretty sharp change" in the company's strategy and that "we're convinced they're going to overpay."
In the J.P. Morgan report, Weinstein said that if Stryker does reach an agreement with S&N, the uncertainty around anti-trust approval and the likely lengthy time to deal closing (anywhere between nine and 12 months) mean that even with an S&N deal, Stryker may still have a tough time outperforming in 2015.