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Medtronic hungry for deals, but cautious

In Wall Street, you’re only as good as your next acquisition.

Try telling that to Medtronic Inc. Over the past two years, the company, based in Fridley, has purchased nine companies: $700 million for CoreValve Inc., $370 million for ATS Medical Inc., $123 million for Osteotech Inc. to name a few.

Yet the company has had little to show for it. Since January, Medtronic shares have fallen nearly 25 percent to $34 a share.

First quarter sales rose just 2 percent, prompting the company to reduce its sales and profit forecast for 2011. And some analysts suspect Medtronic will further downgrade that guidance when the company reports second quarter earnings next week.

What gives? CEO Bill Hawkins says the global health-care market is slowing down. The company is earning less profit as prices fall amid greater competition and falling demand.

“Medtronic is seeing price declines accelerating by 100-200 basis points into the mid single digits as hospitals focus more on cost controls and competition on price increases,” according to a report by Morgan Stanley.

The problem is not limited to Medtronic. In the third quarter, medical technology stocks rose just 4.6 percent, the second worst performance of ten sectors tracked by Morgan Stanley.

Analysts say medical device makers must continue to make acquisitions to goose sales. And with plenty of cash, Medtronic is poised to do just that.

The problem is, the type of smaller “tuck in” acquisitions that Medtronic prefers to make doesn’t seem to be impressing Wall Street. Nor has those deals significantly boosted Medtronic’s revenue engine, at least not yet.

Knowing this, Hawkins has told several media outlets that Medtronic is hungry for deals. But the CEO has been far more cautious when it comes to big one, the mega deal that consolidates industries.

Hawkins’ caution is understandable. Big deals can go awry and set back a company for years. Just look at Boston Scientific Corp.’s ill-fated $26 billion purchase of Guidant Corp.

But Hawkins may have no choice but to pull the trigger soon. Here’s why:

  1. Global demand for medical devices is waning, a long term trend that’s not likely to reverse course anytime soon.
  2. With billions of dollars in cash, Medtronic can certainly afford it.
  3. The timing is ripe for consolidation. A weak economic recovery has depressed valuations, meaning Medtronic can avoid overpaying.
  4. A sizable acquisition can meaningfully increase sales and take out a competitor or two. With fewer rivals around to compete for customers, Medtronic can boost profitability by charging higher prices for its products.

Medtronic has never ruled out a big acquisition but says such a deal invites more scrutiny from top brass.

“Size is obviously a factor, but it’s not what we start with,” Chad Cornell, vice president of corporate development who oversees the company’s acquisition/investment portfolio, recently told MedCity News.

The driving force behind any deal is “how can we add value?” he said. “That’s the key lens.”

At this point, though, Medtronic may need a longer lens.

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