Abbott's choice: acquire more businesses now or pay later

Signs of renewed consolidation among medical products companies will test a prodigious dealmaker's appetite for acquisitions.

Abbott Laboratories CEO Miles White loaded up at the M&A buffet last year, completing two major deals. Like other hospital suppliers, Abbott is snapping up new product lines as its customers consolidate. Bigger hospital chains are trimming their roster of vendors, favoring those with broader portfolios.

Until recently, White's acquisitions appeared to give Abbott a strong position as a one-stop supplier of cardiovascular products. The $25 billion purchase of St. Jude Medical in 2017 dramatically expanded Abbott's medical device business, adding new offerings in heart monitoring, neuromodulation and other areas. Abbott also beefed up in diagnostics with the $5.3 billion takeover of Alere.

But Stryker's reported bid for Boston Scientific could redefine diversification in medical products. The proposed deal, reported by the Wall Street Journal, would combine makers of orthopedic and cardiovascular products. Meanwhile, other Abbott rivals continue expanding their repertoires. Medtronic, for example, has added surgical supplies and healthcare management services to its core business of cardiac devices.

White now faces a choice: Jump back into the merger arena or rely on internal revenue sources to drive growth and support Abbott's shares, which have leveled off since climbing 40% to a five-year peak of $63.62 during the 12 months ended in March. Historically, White has preferred acquisitions. But the St. Jude deal added significant debt, threatening Abbott's ability to maintain the steady dividend increases investors have come to expect from the company.

Lately, White has talked less about deals and more about debt reduction, dividends and product launches. On a first-quarter earnings call with analysts in April, he said M&A "is not on our priority list right now."

With short-term growth prospects looking strong, White can play it coy for a little while. The North Chicago, Ill.-based company expects internally generated revenue to rise 6 to 7% this year, well above its usual low- to mid-single-digit rate. Medical devices, which became Abbott's biggest business after the St. Jude acquisition, posted 9.4% organic revenue growth in the first quarter. A big share of the growth came from new products under development at St. Jude before Abbott acquired the St. Paul, Minn.-based company.

Preserving St. Jude's innovative culture poses a challenge for Abbott, which has never been known as an R&D hothouse. St. Jude's top R&D executive left earlier this year, possibly signaling that Abbott's culture is taking over.

Only time will tell if Abbott can sustain consistent long-term growth through internal innovation. But if White forgoes acquisitions now, and internal revenue sputters in a few years, it may be too late to change course and buy future growth.

"You're running out of dance partners," says analyst Debbie Wang of Chicago-based Morningstar. "Everybody's pairing up."

Successive waves of consolidation have reduced the number of potential buyout targets big enough to move the growth needle at Abbott, which is expected to post $31 billion in revenue this year. And even smaller medical products companies come with hefty price tags. For example, Edwards Lifesciences, a device maker with less than $4 billion in annual revenue, carries a market capitalization of more than $30 billion. Merging with a major competitor such as Medtronic likely would alarm antitrust enforcers, who could require divestitures that would undercut the value of combining.

White also might consider acquiring a services provider, as Medtronic has done. Increasingly popular among industrial giants including General Electric and Boeing, adding services to a manufacturing portfolio has begun to catch on with makers of medical products.

White hasn't tipped his hand, but acquisitions are always on his mind. On the earnings call he emphasized that Abbott "has capacity" for buyouts even if it hasn't zeroed in on any particular targets. Based on his track record, I don't expect White to let that capacity go to waste.

"The risky choice for Abbott's White: Buy now or pay later" originally appeared in Crain's Chicago Business.