Pushing further into the medical products business, Tyco International last week agreed to buy U.S. Surgical Corp. for about $3.9 billion in stock and assumed debt.
In the process, the acquisition-happy Tyco conglomerate is hoping to forge a medical products division whose sum is greater than its parts. For hospital purchasers, Tyco's growing portfolio of medical companies may offer an alternative for one-stop shopping to existing multiline companies, such as Johnson & Johnson.
Tyco has been busy building a medical products division through acquisitions. In 1994 Tyco acquired Mansfield, Mass.-based Kendall. This January, the com-pany expanded its medical portfolio by buying St. Louis-based Sherwood Davis & Geck from drug giant American Home Products for $1.8 billion (See chart).
Now Norwalk, Conn.-based U.S. Surgical, whose surgical staplers and mini-mally invasive instruments revolutionized healthcare, is set to join the Tyco pack.
After the U.S. Surgical merger, medical products would account for about $4.5 billion of Tyco's $15 billion in annual sales. Subject to shareholder and regulatory approval, the deal is expected to close in three to six months.
Legally incorporated in Bermuda, Tyco is the world's largest maker of fire protection and electronic security systems. The company's operations are headquartered in Exeter, N.H.
The challenge facing Tyco is to wring value from all three medical products companies, which make products increasingly viewed as commodities. Tyco did not return calls for comment on the transaction at deadline.
Tyco is betting it can reap savings by reducing overhead while simulataneously boosting sales with a broader product portfolio. Although the strategy has merit, it won't be a snap to pull off.
"If you have a commodity product, you have to be able to play the pricing or bundling game," said Charlene Lu, an analyst with Prudential Securities, New York. She expects U.S. Surgical to get a boost by going with Tyco. "Does it pull them out of doldrums? No, but it does give them a little bit better position."
Fiercely independent, U.S. Surgical acceded to a buyout after struggling in recent years. Relentless competition, from Johnson & Johnson in particular, has helped turn U.S. Surgical from a fast-growing medical powerhouse into a laggard. In 1997 the company had net income of $94 million on sales of $1.2 billion, down from the previous year's results of $109 million in net income on sales of $1.1 billion.
Significantly, in the past two years, U.S. Surgical has lost out to Johnson & Johnson on important purchasing contracts with Premier, VHA and Tenet Healthcare Corp.
And in a bad omen for Tyco's synergistic strategy, U.S. Surgical unsuccessfully test drove an alliance with Sherwood Davis & Geck on a failed bid for a sole-source VHA supply agreement for wound closure products. Despite bad blood between many VHA hospitals and Johnson & Johnson, VHA awarded the three-year deal, worth as much as $300 million a year, to the New Brunswick, N.J.-based company last October.
"I'm sure what Tyco is hoping is that compliance within the (purchasing) groups won't be 100%, and they're positioning themselves for when the contracts come up for bid again," said Jonathan Osgood, an analyst with BT Alex. Brown in Boston.