Wednesday, July 18, 2007

GE's Abbott Indigestion

Now that GE has pulled out of its proposed $8.13 billion all-cash deal for Abbott Diagnostics (ADD) and Abbott’s point-of-care testing business, will anyone else step up to the plate?

Perhaps the logical suitor is P&G, because from what we hear, only the makers of Pepto-Bismol could have treated the massive indigestion the parties were experiencing.

We believe the explanation that it fell apart because of the complexities involved in prying them—ADD, specifically—out of Abbott.

Some analysts have suggested that compliance issues and issues over the transfer of licenses also helped scotch the deal. But while there were literally thousands of transition services agreements that the parties were going to have to enter into, in the end, it appears that the degree to which ADD is integrated into the rest of Abbott, and how difficult it would therefore be to deliver it to a company that perhaps has a different culture, very much surprised both sides. And that pain was going to persist over a protracted integration period—“a lot longer than three years,” according to one insider.

What’s puzzling is that this would not be the first time such a diagnostics business was sold lock-stock-and-barrel to a health care generalist (Siemens, for example, managed to buy Bayer Diagnostics and immunoassay player Diagnostic Products last year). Nor is GE inexperienced at handling such moves (there's too many potential links to choose from for this one to even begin to know where to start).

So we have to ask: Were the cultures an obviously terrible mix? That’s very possible, and yes, it'd be interesting to contemplate what those differences may say about each company. We’ve also heard that the first marching order for Abbott now will be to improve the level of service to its diagnostics customers, which of course suggests GE may have uncovered something specifically troubling during its preparations.

In any event, the take-home is it’s unlikely that Abbott will be looking for another buyer for those businesses. And with the exception of Roche, which unlike Abbott, views diagnostics as intimately connected with its drug development ambitions and personalized medicine, there aren’t really any very large in vitro diagnostics (IVD) players left from whom GE could wring out efficiencies, exploit scale, and improve productivity in the IVD market the way it expected to with Abbott.

It may continue pursuing smaller, more targeted acquisitions in IVD and, like Abbott, certainly in molecular diagnostics. And with some of the premiums companies offered recently to companies with molecular content, like Biosite (63%, measured from the time of Beckman-Coulter’s initial offer for it before Inverness finally landed it), TriPath (58%, from Becton Dickinson), and Ventana (43% at the time of Roche’s recent hostile tender offer of $75 per share), an exit via acquisition is nearly impossible for those companies to resist at today’s prices, leading to a wave of consolidation that might only pick up more steam, now.

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