Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

(Updated )

OK, so we're doing this.

Abbott Laboratories on Wednesday filed suit to terminate its acquisition of medical-test maker Alere Inc., adding a new chapter to what has become one of the year's ugliest merger spats. Alere said the suit is without merit and will "take all actions necessary" to force Abbott to see the deal through.

The moves come just weeks after the companies looked to be making progress toward a rapprochement of sorts over their $8.4 billion deal (including debt), with Alere agreeing to turn over information related to bribery probes and U.S. billing issues that arose following the announcement of the deal in February. Alere, however, appears to have interpreted that settlement as more of a guideline. The company hasn't yet provided the documents Abbott is seeking, said spokesman Scott Stoffel.

Deal Doubts
The difference between Alere's stock price and Abbott's offer has swelled as traders wagered the company's woes would eventually cause the deal to collapse.
Source: Bloomberg

Alere has in the past pointed to the nearly one million pages of documents it's produced for its acquirer. But it's the substance of the documents that counts and according to Abbott, that's where Alere is still coming up short. Continuing to withhold information makes it look like Alere is either hiding something, or thinks it can successfully argue that the bad news that's dogged it over the past 10 months isn't material enough to give Abbott a way out of the deal. Either strategy is a mistake.

As I've previously argued, Alere had a much stronger argument when the worst it was facing was mere investigations. The probes into its overseas sales practices had a chance of turning out to be nothing, and a number of analysts dismissed them as not that big of a deal. But the game changed with the company's disclosure last month that its Arriva diabetes division was accused of seeking Medicare reimbursement for 211 dead people and had been removed from the U.S. government program that provides coverage for the elderly.

That puts at risk a chunk of Arriva's sales, which stood at $88 million for the first nine months of the year. You can debate whether that's a material impact for a company with billions in annual revenue, but it is an impact. As is the charge of as much as $90 million that Alere is taking in connection with an FDA-requested recall of certain devices.

One Headache After Another
Alere has suffered setbacks and been the target of probes since announcing its deal with Abbott
Source: Bloomberg

The less-than-airtight case should give Alere reason to negotiate with Abbott rather than fight it out in court. It has a lot more to lose from a legal showdown than it does from having substantive discussions on a reduced deal price. Exhibit A: Alere shares, which were halted on the news, slumped as much 11 percent when they resumed trading. As of 1:20 p.m. New York time Wednesday, the stock was about $20 below Abbott's $56-a-share offer and below where it was before the deal was announced. 

Abbott is taking on a risk by pursuing this path as well. It still hasn't provided a solid answer as to why it looked past the red flags that were already apparent at Alere before their merger agreement was signed. The scope of the issues has expanded -- particularly in the case of the Medicare and Medicaid billings allegations -- and there are more investigations, but Abbott saw enough to have "significant" reservations that it didn't heed. That undermines its outrage a bit. The onslaught of troubles at Alere is, however, justification for a renegotiation of the deal terms.

Is This Over Yet?
Abbott recouped some losses Wednesday on the news of its suit to terminate the Alere deal, but was still down on the day
Source: Bloomberg

As Abbott's Stoffel says, "Alere is no longer the company Abbott agreed to buy 10 months ago." That's a pretty reasonable characterization, though it's not the same thing as saying Alere has no value. The company is still a decent target from Abbott's perspective, with as much as $500 million in synergies possible. There could still be a path to get a deal done -- but only if Alere works with Abbott on this.

Given the steady drumbeat of negative surprises at Alere, no company in their right mind is going to throw a new price tag out there without first getting comprehensive information on all of its woes. The sooner Alere realizes that, the better its chances of redeeming some value for shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates with Alere market activity in the seventh paragraph.)

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net