CEO SUMMARY: Both companies have said little about their mutual decision, announced last week, to kill the pending sale of Abbott Diagnostics and Point-of-Care businesses to General Electric. One probability is that GE decided, during due diligence, that its willingness to pay a premium price—15 times EBIDTA—was unjustified by the quality of the assets and Abbott’s current affairs with the Food and Drug Administration.
MANY WERE SURPRISED LAST WEEK when General Electric Corp. and Abbott Laboratories, Inc. announced the cancellation of the pending acquisition that would have sent Abbott’s primary diagnostics and point-of-care testing businesses to GE.
General Electric had earlier agreed to pay about $8.13 billion to purchase the diagnostics businesses which, in 2006, generated approximately $2.7 billion in revenue. That rather high price for Abbott Diagnostics’ revenue stream seems to be part of the reason why GE did not wish to finalize the purchase.
At the same time, the decision by General Electric to terminate its purchase of Abbott’s main in vitro diagnostics (IVD) business unit and a line of point-of-care testing won’t mark the end of GE’s interest in creating a larger presence in the IVD marketplace. THE DARK REPORT predicts GE will continue to pursue opportunities in IVD.
In the days following the announcement of the deal’s collapse, Wall Street analysts were generally in agreement about why it had failed. Citigroup analyst Jeffery Sprague, in an investor note, wrote that this may be a “blessing in disguise” for General Electric, stating that, at a valuation that was 15 times EBIDTA (earnings before interest, depreciation, taxes, and amortization), “the Abbott business was a good strategic fit for GE, but, in our view, was not a critical asset and was very expensive. At that valuation, we believe the business and deal terms needed to be pristine for GE to proceed.”
“A Business In Decline”
Analyst Peter Bates in the Baltimore, Maryland, offices of T. Rowe Price & Associates was quite blunt, declaring that “It’s good they’re not buying this asset. It was a business in decline and GE should be buying back its stock.” Bates’ fund owns 143 million shares of GE, currently worth about $5.7 billion.
The public statements by General Electric and Abbott Laboratories about the break-up of the deal were terse, with GE giving more of an explanation than Abbott, stating, “GE and Abbott worked diligently to complete the transaction but were unable to reach agreement on final terms and conditions. As a result, they agreed it was in the best interests of both companies to mutually terminate their agreement and discussions.”
Glenn Navarro of Bank of America was more direct in his explanation for the deal’s collapse. He stated, “In talking to the company [GE], it is our sense that GE asked for additional terms that would have decreased the value of the transaction and these terms were not acceptable to the management [of Abbott].”
FDA Issues A Factor?
Since the diagnostics division of Abbott Laboratories has a much-publicized history of problems with the FDA, it could be that this was one source of disagreement between the buyer and the seller. A consent decree between Abbott and the FDA is still in effect from issues that surfaced in 1999. (See TDR, November 22, 1999.) An Abbott spokesman said that all but one of the diagnostics division’s manufacturing sites have recently passed FDA inspection. That site is in Irving, Texas and was the subject of an FDA warning letter, dated March 13, 2007 and posted on the FDA Web site. (See TDR, April 27, 2007.)
Last May, General Electric CEO Jeffery Immelt, at an investor conference, noted his company’s wariness at the situation. “The complexity [of this acquisition] is really driven around it being an asset deal that has got a very complicated footprint, so there are a lot of transition service agreements,” he explained. “It being in a consent decree, as Abbott has been, clearly we are not going to acquire the company with regulatory risk. And they wouldn’t expect that either.”
There are plenty of reasons to believe that GE will continue to look for opportunities to expand its presence in the IVD market. Prior to becoming GE’s CEO, Immelt ran GE Healthcare. He is is knowledgeable about the opportunities in healthcare. In fact, last week, a GE spokesperson, answering questions about the collapsed deal, stated that GE is “committed to early health and [will] continue to invest in that strategy.”
There are other IVD companies which could give GE an immediate and significant market position in in vitro diagnostics. For example, Beckman Coulter Corporation, with revenue of $2.57 billion last year, has a market capitalization of about $4.26 billion. Dade Behring, Inc. which reported 2006 revenue of $1.78 billion, has a market cap of almost $4.65 billion. Even Quest Diagnostics Incorporated could be a merger/acquisition candidate if GE wanted a presence in the service side of clinical diagnostics. During 2006, Quest Diagnostics reported revenue of $6.24 billion and its market cap is currently in the range of $10.6 billion.
These examples are simply to demonstrate that GE has the buying power to consider such acquisitions. It has many options to consider if it wanted to buy its way into the IVD industry. Thus, during the next 24 months, the laboratory profession should not be surprised at any kind of merger or acquisition GE develops as a way to boost its presence in in vitro diagnostics.
Abbott Diagnostics’ Future
For Abbott Laboratories, the future of its IVD business division is probably now more complex. For one thing, Abbott corporate has signaled its willingness to divest the business. One consequence of the decision to sell to General Electric is that some productive executives and sales producers at Abbott Diagnostics will be more amenable to jumping ship and joining other companies that promise stability.
It may be also be true that, until Abbott Diagnostics resolves its issues with the FDA and is released from the current consent agreement, it will be a tough asset to sell. Further, it is still uncertain how laboratory customers and prospects will react to the fact that Abbott Diagnostics has been put up for sale.