Article preview from IN VIVO - February 1, 2011
For the first time in five years, large cap, mid cap and financial buyers are all showing a willingness to acquire medical device companies thanks to improving credit markets and strong cash reserves.
Article preview from IN VIVO - February 1, 2011
The medical device industry hasn't cleared the woods yet, but economic indicators and a positive 2010 suggests this might be a good year for mergers and acquisitions. Many of the medical device industry's leaders still haven't regained the value they lost since that fall, with Medtronic Inc., Baxter International Inc., Covidien Ltd., Boston Scientific Corp. and Stryker Corp. all sporting lower market capitalizations and in some cases, significantly lower value. But those companies had cash reserves to rely on while smaller, mid cap buyers didn't have the cash, stock value or ability to borrow to make acquisitions.
The merger and acquisition market did start to turn around last year, producing returns for investors and new growth for acquirers. ( See Exhibit 1.) Every trend that had been depressing M&A activity in the second half of 2008 and 2009 reversed itself, creating the ingredients for a strong year in M&A in 2011. "We are optimistic," says Mark Secrest, managing director of health care investment banking at Stifel Nicolaus Weisel. The "dislocation of the credit market" disrupted the merger and acquisition market for all but a few cash-rich buyers in 2009, he says, but that's turned a corner. "We have a functioning credit market now," he says. "It's very active – particularly the high yield market. While there is still a preference for bigger loans, you don't have to borrow $1 billion to get credit. There's finally some availability for smaller, middle-market loans as well. And rates remain historically low – so far."
Dropping interest rates and the availability of capital are opening doors for many new buyers, particularly smaller companies with market capitalizations below $5 billion and private equity houses looking to divest divisions or take companies private, bankers say. While small companies and private equity firms may be shopping in different aisles than traditional large cap buyers, their presence still could create a competitive market that could help drive up prices.
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