Abbott to Acquire St. Jude Medical for $25 Billion

A rash of deals on Thursday showed that healthcare companies are convinced, regardless of tax benefits, that bigger is not only better, it is essential. The more than $40 billion of deals announced on Thursday can be explained by the need to get bigger and the desire to acquire growing biotech firms and product lines to make up for older products whose sales are in decline.

Case in point, Abbott Laboratories Inc. (Abbott Park IL) agreed to buy heart-device maker St. Jude Medical Inc. (St. Paul MN) for $25 billion, its biggest ever acquisition as the industry consolidates to gain bargaining power with hospitals.

St. Jude shareholders will receive $46.75 in cash and 0.8708 shares of Abbott common stock, representing approximately $85 per share, according to a statement Thursday. That’s 37% above St. Jude’s closing price on Wednesday.

Abbott will also assume or refinance St. Jude’s $5.7 billion in debt. Medical-device makers are merging to get access to new technology as hospitals push for lower prices. After receding back from mega deals since spinning off its brand name drug business as AbbVie Inc. in 2013, Abbott is now joining Medtronic PLC (Dublin IRL) and Johnson & Johnson (New Brunswick NJ), which both made their largest purchases in recent years.

Abbott CEO Miles White frequently spoke about his desire for bigger deals while pursuing smaller companies, although the recent rounds of M&A boosted the prices of potential targets, leaving fewer options. Abbott, an industry leader in heart stents, has been bulking up its generic-drugs business in emerging markets and nutrition products sold directly to consumers in recent years.

With St. Jude, it’s gaining complementary products like pacemakers, heart valves and devices to treat atrial fibrillation. There is an obvious hole in the medical device business, specifically around cardiovascular products, and St. Jude is the perfect fit to fill that gap, according to Jonathan Palmer, a Bloomberg Intelligence analyst.

“In an industry where a larger portfolio is increasingly important, Abbott just built a real medtech franchise,” said Joanne Wuensch, an analyst at BMO Capital Markets Corp. who rates the stock outperform. “From our perspective, there is very little, if any, product overlap, but a real opportunity for cross-selling.”

St. Jude soared 26% over the week to $76.20, while Abbott sagged 12% to $38.92.

Monday, May 2, 2016 / Vol. 24 / No. 17