IT WAS 10 YEARS AGO THIS MONTH when a major event changed the competitive landscape for lab testing services. On February 9, 1999, Quest Diagnostics Incorporated signed an agreement to purchase SmithKline Beecham Clinical Laboratories (SBCL).
It was the largest laboratory acquisition up to that point. In one masterstroke, Quest Diagnostics would become the largest laboratory company in the world and eliminate one of its two main competitors. At the same time, the deal would shrink the number of billion-dollar lab companies in the United States from three to two. (See TDR, February 22, 1999.)
Quest Diagnostics agreed to pay $1.27 billion for SBCL, which had annual revenue of $1.05 billion. In an interesting twist to the transaction, SmithKline Beecham, Ltd., owner of SBCL, agreed to receive $1.025 billion in cash at closing, along with 12.6 million shares in Quest Diagnostics. This stock was worth $245 million and gave Smithkline a 29.5% stake in Quest Diagnostics.
Good Deal For SmithKline
During the next five years, the value of those Quest shares skyrocketed. That added tens of millions of dollars to the value of the Quest stock held by SmithKline. Hindsight has validated both the timing of the sale and the wisdom of SmithKline for taking part of the purchase price in the form of stock in Quest Diagnostics.
Quest Diagnostics’ then-CEO, Ken Freeman, had eyed SBCL for several years. On more than one occasion, Freeman had publicly observed that, in any industry dominated by three companies, sooner or later one of the three companies disappeared from the marketplace. In a three-company oligopoly, this had often happened in different industries.
In Freeman’s view, Quest Diagnostics could guarantee its survival—and at the same time become the dominant market player—if it actively removed one of its two primary competitors from the marketplace. This motivated Freeman to approach SmithKline Beecham several times in the years prior to the acquisition agreement and offer to purchase SBCL.
Interest In Selling Lab Unit
However, it was not until SmithKline Beecham undertook a major corporate restructuring that there was interest in divesting its laboratory testing division. SBCL was one of several business units it either sold or overhauled during 1999.
Time and subsequent events have confirmed Freeman’s strategic vision. The SBCL acquisition gave Quest Diagnostics significant scale and infrastructure in several important metropolitan areas around the United States. It also radically altered the managed care contracting status quo among the three blood brothers and took the lowest-priced competitor out of the contracting arena.