Abbott and Alere Need to Keep Talking
Can’t Abbott Laboratories and Alere Inc. just get along?
The two medical device makers have been locked in a war of words (and lawsuits) for months over their pending combination. Abbott wasn't pleased that its $8.4 billion acquisition target repeatedly delayed its regulatory filings and became the subject of multiple government investigations. Tough luck, says Alere, which is seeking to compel Abbott to complete the deal anyway and to back off from reported threats to go to extreme lengths to find a way to kill it.
We've come a long way since February, when Abbott CEO Miles White had this to say about the just-announced Alere purchase: "I kind of wonder why we didn't aspire to have this a lot sooner." M&A is hard. But both sides have something to lose by duking it out in court. A better solution may be to have a frank discussion on a price renegotiation.
Things did take a somewhat congenial turn this week, with Alere agreeing to turn over files related to the probes of its sales practices abroad and billing issues in the U.S. The move puts to bed the lawsuit that Abbott had filed earlier this month accusing Alere of withholding that information. Alere's attempt to force Abbott to go through with the purchase is still pending, but perhaps the companies can use this negotiating progress to achieve a broader rapprochement.
Alere has had somewhat of an upper hand because of the inherent difficulties in proving a material adverse change that would let Abbott walk away from the merger agreement. The courts haven't tended to favor acquirers on this issue, and there are specific factors working against Abbott. For one, while the extent and number of government investigations targeting Alere has expanded, Abbott was aware of the general underlying issues when it agreed to the takeover. 1 While Abbott expressed "significant concerns" regarding the ongoing investigations, that didn't stop it from raising its bid twice after starting due diligence.
Many of these investigations are also still just that -- investigations, where no definitive wrongdoing has been ascertained yet. There could be fines, or it could all amount to nothing. The most significant exception to this is Alere's disclosure earlier this month that its diabetes division had been removed from the Medicare program amid accusations that it submitted claims for 211 dead people. That is real and will potentially result in a financial hit for the company. Alere can still argue that the overall impact isn't that meaningful -- the diabetes testing business made up a fraction of its revenue in the nine months ended Sept. 30 -- but this definitive bad news undoubtedly weakens its hand. It's also taking a charge of as much as $90 million in connection with an FDA-requested recall of certain devices.
Alere may yet win a court battle, but investors who rode the stock on its wild ride this year may be willing to sacrifice a few bucks in exchange for certainty. Before the news that Alere had agreed to hand over documents to Abbott, shares of the medical-test maker were trading below where they were before the deal was inked in February. Knocking Abbott's $56-a-share offer down to, say, $51 or $52 would still give shareholders a more than 30 premium to the company's unaffected price. Medical-device companies have sold for higher valuations, but Alere is more of a fixer-upper than a shiny new toy and a price in that range would imply a not-too-shabby multiple.
It's also worth it for Abbott to try to get a deal done at this point. Fighting with Alere to walk away could leave the company saddled with large financial penalties and without a business that CEO White once said was "a great fit coming into good hands." Alere may not be worth what it once was to Abbott, but it's not worthless. The deal was expected to add more than 20 cents to Abbott's earnings per share by 2018 and yield about $500 million in synergies by 2019. Presumably, those benefits still exist to a large extent and could be all the more attractive with a lower price tag.
Ideally, Abbott would have given some more thought to the looming landmines at Alere earlier on, but at this point, both companies might as well make the best of things.
As of February, Alere had disclosed an SEC subpoena into its sales practices in Africa, questions about improper Medicaid and Medicare claims in Tennessee and quality-control probes into certain products and a San Diego facility.
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