No Easy Way Out for Abbott as Deal Target Faces Bribery Probeby and
Alere disclosed in March some overseas units are investigated
Corruption cases usually not a deal-breaker, lawyers say
Abbott Laboratories tried to end its $5.8 billion agreement to buy Alere Inc. after finding out in mid-March that the medical-testing company was swept up in a U.S. probe of bribery overseas. Alere’s shares, meanwhile, are trading at levels suggesting that investors have their doubts about the transaction -- at least at the current price.
Not so fast, legal experts and analysts say. Violations of the U.S. Foreign Corrupt Practices Act, or FCPA, aren’t necessarily a deal-breaker and with Alere refusing to go away, Abbott may have no easy way out.
“It’s very common to see corruption come up in the due diligence process of an M&A transaction,” said Danforth Newcomb, an FCPA attorney at Sherman & Sterling LLP who isn’t involved in the case. “Generally speaking, that results in a two-sided investigation by the company to be acquired and the acquirer. The transaction usually closes after some delay and added cost.”
While the Jan. 30 purchase agreement between the two companies outlines several ways in which there could be a breach of contract, it isn’t clear whether any has occurred. Past examples show that when an acquisition and an FCPA probe are concurrent, there’s no standard way to come to a resolution. Some deals went through -- like General Electric Co.’s purchase of Alstom SA’s energy assets for about $15 billion and Zimmer Holdings Inc.’s $14 billion acquisition of orthopedic manufacturer Biomet Inc. In a few cases, they were dropped, like Lockheed Martin Corp.’s effort to buy Titan Corp. in 2004.
Abbott, the world’s largest maker of heart stents and adult nutritional beverages, said Wednesday that it’s auditing Alere’s books and so far has gotten a partial response from the company. Alere, in an e-mailed statement, reiterated that it is in “full compliance with its merger agreement” and confident that the transaction will be completed in accordance with its terms.
Alere’s shares were little changed at $42.78 on Wednesday, slightly above the $37.20 close on Jan. 29, before the transaction was announced, and 24 percent below Abbott’s $56-a-share offer. If the purchase goes through, Abbott will become the leading provider of point-of-care medical tests, which are done at the doctor’s office or at a patients’ bedside.
The U.S. government has been adding prosecutors to help its efforts to crack down on violations of the FCPA, a law that bars employees or agents from bribing government officials to obtain or retain business or secure an improper advantage. Abbott is among the few large health-care companies that haven’t faced an FCPA probe in recent years, even though it makes about 70 percent of its revenue abroad.
The timing of Alere’s disclosures shows that a regulatory probe into some of its overseas operations was already under way during the due diligence process. Six weeks after the agreement was signed, Alere reported that the investigation had widened to include a criminal inquiry into practices in several other regions.
Martin Weinstein, an attorney at Willkie Farr & Gallagher LLP, likened Abbott’s situation to that of someone under contract to buy a house who discovers it has asbestos: “Nobody wants to buy a house with asbestos until they figure out how much it will cost to remove it. The goal is to try to figure out how much of an impact those issues have.’’
In the purchase agreement, announced Feb. 1, Alere’s managers certify that they had been in compliance with the FCPA since 2014. Three months earlier, however, Alere disclosed that its African operations were being investigated by the U.S. Securities and Exchange Commission.
On Feb. 26, Alere said it would delay filing its annual report with securities regulators, citing revenue recognition in Africa and China. Then, on March 15, the company disclosed that it had received a grand jury subpoena four days earlier from the Justice Department, which was looking into its sales practices in Asia and Latin America, in addition to Africa.
“Abbott wants to understand how big an issue they have,” said Weinstein, who isn’t involved in the case. “Some investigations may start in one country and end up going from being relatively minor to much more serious in a matter of weeks.’’
Abbott Chief Executive Officer Miles White created confusion on April 20 after he declined to reiterate his commitment to the deal when asked on a conference call, sending Alere’s shares down. On April 28, Abbott announced another acquisition, its largest ever: the $25 billion purchase of St. Jude Medical Inc. That transaction raised more questions about Alere, even though Abbott said it had the wherewithal to carry out both deals.
Later that day, Alere said Abbott had tried to end the deal and offered to pay $30 million to $50 million in legal fees to terminate the transaction, a request it “promptly rejected.” Abbott declined to comment on whether it made the offer.
Investigations into violations of the FCPA can take years. The U.S. could drop the case, but it also could bring criminal charges or force extensive compliance changes, as it has with more than a dozen health-care companies. Settling a case can cost a company tens of millions of dollars or more in penalties. Once the probes are over, businesses may not be as robust as they appeared at the time of the takeover, Weinstein said.
Those issues may not be enough to sever the deal.
“Abbott’s body language suggests they don’t want to complete the deal,” said Jonathan Palmer, an analyst with Bloomberg Intelligence in New York. “Once you get to the point where you have a signed agreement, most of the time they typically go through.”