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Treatment worse than disease

28 April 2016 By Robert Cyran

St. Jude is the patron saint of lost causes. Investors seem to be taking Abbott Laboratories’ $25 billion deal to buy the eponymous medical-devices company in that spirit. Abbott’s market capitalization tumbled over $5 billion after it announced the purchase of St. Jude Medical. The company’s problem is that the transaction looks to be destroying value.

Abbott is paying a $6.5 billion premium, about 37 percent above St. Jude’s closing share price on Wednesday. It forecasts synergies worth $500 million a year by 2020. Say about three-quarters of those come from cost cuts and ignore the remaining unreliable revenue synergies. Taxed at Abbott’s effective tax rate of about 20 percent and capitalized on a multiple of 10, those would be worth $3 billion – but that figure has to be marked down since they won’t all materialize until 2020.

The deal announcement touts the fact that the transaction will add to earnings per share, but that’s no guarantee it makes financial sense overall. It requires hefty borrowing, and Abbott has another acquisition in the pipeline, too. The combination does make some strategic sense if antitrust authorities allow it. Abbott is a big maker of coronary stents and heart valves, while St. Jude makes pacemakers and other devices for failing hearts. Hospitals have been consolidating, and using fewer suppliers. A bigger Abbott should give it more heft and negotiating power.

Abbott executives hinted during Thursday’s call with investors that they expect the acquisition to earn a double-digit return within five years. That’s a while to wait for the kind of payback needed to justify a transaction, and it requires the combined company’s management to make a success of the consolidation strategy. Investors’ skeptical reaction suggests they believe divine intervention may be needed to turn this deal into a winner.


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