Abbott and Alere: It's an M&A Miracle
April showers bring May flowers and, apparently, M&A miracles.
Abbott Laboratories has been trying for months to get out of its agreement to buy embattled medical-test maker Alere Inc., but on Friday, the two sides agreed to cancel their lawsuits and move ahead with a takeover at a reduced price. 1 Abbott will now pay $51 a share for Alere ($5.3 billion excluding debt), about a 9 percent reduction from its original offer.
The companies would have saved shareholders a lot of headaches by reaching this meeting of the minds sooner; it's been 14 months since Abbott and Alere announced their original tie-up and about 13 months since things started going south with delayed regulatory filings and mounting government investigations at Alere. But it's still the best possible outcome. The price reduction is just the right amount to allow both sides to save face.
Neither Abbott nor Alere had an airtight case against the other. Alere isn't the same company it was when Abbott agreed to buy it, particularly the company's Arriva diabetes unit. That division -- in Alere's words -- is at risk of going out of business after the government accused it of submitting invoices for dead people and revoked its Medicare billing privileges. We're also still waiting on Alere's 2016 annual filing as the company reviews inappropriate conduct at its Korean subsidiary and revenue recognition practices at its Japan operations. On Monday, Alere said it would need to restate its results for 2013, 2014 and 2015 and the first three quarters of 2016.
But Abbott never provided a good explanation as to why it had a right to be outraged at Alere's problems now despite paying little heed to early red flags in the due diligence process.
From Alere's perspective, the new $51-a-share price tag is still a respectable 37 percent premium to its unaffected stock price. It's also higher than the $50-a-share proposals Alere got from two other suitors during the initial bidding process. And it's certainly better than the paltry $30 million to $50 million Abbott offered Alere last spring to just forget the whole thing. Alere can still say it maximized value for shareholders, while also putting an end to this agonizing period of uncertainty.
Abbott, meanwhile, is now paying a price closer to what it arguably should have offered in the first place.
According to a proxy filing, Abbott started with a proposed takeover price range of $49 to $53 a share. After raising "significant concerns regarding ongoing governmental investigations" at Alere, Abbott somewhat inexplicably wound up raising its bid all the way to $56. 2 That's even as the alternative bidder that lasted the longest -- "Company F" -- never formally offered more than $50. 3 It's not clear if Abbott was aware of the status of these other negotiations, but what is clear is that the company made a decision to fight hard for Alere.
Abbott has been able to quell a number of investor doubts about its acquisition strategy just by dragging out the Alere closing process. The extra months have given it time to close its concurrent $30 billion purchase of St. Jude Medical and to raise cash, easing concerns that it was overstretching its management team and balance sheet with two large deals. Part of its cash infusion comes from a divestiture of its stake in Mylan NV, a holdover from a past divestiture that had become an overhang amid that company's drug pricing woes. 4
What hasn't been put to rest is the question of whether Abbott CEO Miles White has made the right acquisitions. Alere isn't a bad business, subpoenas notwithstanding. The deal was originally expected to add more than 20 cents to Abbott's adjusted earnings per share by 2018 and yield about $500 million in synergies by 2019, benefits that are likely more or less intact. But Abbott faced questions from the beginning about Alere's lack of revenue growth.
Investors and analysts raised similar concerns about the St. Jude Medical purchase, which increased Abbott's vulnerability to health-care policy changes and at least in part amounted to a bet on more commoditized parts of the cardiovascular device market that rival Johnson & Johnson is moving away from.
The Alere morass appears to be finally behind it. But Abbott now has the even harder task of integrating both deals and using them to propel both earnings and revenue growth.
I was slightly disappointed the press release didn't have more warm-hearted language to contrast with past allegations that Abbott CEO Miles White threatened to make Alere employees' lives a "living hell" and Abbott's claims that Alere had been deceptive and staged lawsuits as publicity stunts.
Abbott wanted to make a $54 a share offer contingent on a resolution of a 2012 subpoena from the Office of Inspector General, but after Alere protested, Abbott just dropped the matter and raised its offer even further to $56.
While Company F signaled it might be willing to modestly raise its offer, its CEO indicated it wasn't prepared to go as high as the mid-$50s.
Abbott also sold its eye-surgery equipment business to Johnson & Johnson for $4.33 billion.
To contact the author of this story:
Brooke Sutherland in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Beth Williams at email@example.com