Could the St. Jude Medical-Abbott Deal Get Competitive?

Huge Deal in the Healthcare Space: Abbott Buys St. Jude Medical

(Continued from Prior Part)

Competitive deals can make your quarter

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. Recently, we saw a bidding war in the Starwood (HOT)-Marriott (MAR) deal.

Purchase price was a reasonable premium

Abbott Lab’s (ABT) offer of $85 per share was a 37% premium to the price of St. Jude Medical (STJ) before the deal was announced. A 37% premium is generally considered to be a hefty premium, especially for a transaction of this size.

Was there a process run?

The question wasn’t asked on the conference call, so we’ll have to wait for the preliminary proxy statement to find out the background of the deal. If St. Jude didn’t run a market check, then there could be a possible competing buyer.

Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the price of other deals in the same industry. This is always more of an art than a science. No two companies are alike and interest rate environments change. The best comparisons for this transaction include the following:

• EV3-Covidien

• Guidant-Boston Scientific

• Thoratec-St. Jude

These transactions are the closest deals to the St. Jude merger. In this transaction, Abbott is paying about 5.3x revenues and 20x earnings before interest, tax, depreciation, and amortization. These multiples are lower than the comparables. However, differences in growth rates often account for the difference in multiples.

Other merger arbitrage resources

Other important merger spreads include the Cigna (CI)-Anthem (ANTM) deal. It’s slated to close in 2H16. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the healthcare sector should look at the S&P SPDR Healthcare ETF (XLV)

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Abbott Buys St. Jude Medical for $85 per Share in Cash and Stock

• Part 2 - Rationale for the St. Jude Medical-Abbott Merger Transaction

• Part 3 - What Are the Basics of the St. Jude Medical-Abbott Transaction?