Philips buys Volcano and hopes it will not get burned
Is that it for 2014? Or will this remarkable year see another medtech megamerger before midnight on New Year’s Eve? That Philips spending $1.2bn on vascular imaging company Volcano is only the 12th largest merger announced this year – according to EvaluateMedtech – shows how wild it has been. In fact Philips might have got a bit of a bargain.
Volcano’s management has had a difficult time over the last 18 months, with disappointing sales prompting investor activism. These activists now have the sale they sought, but the $18-a-share deal may come as a disappointment: Volcano’s shares closed at $11.49 yesterday but were trading at $18 as recently as early July.
The task ahead of Philips is to make more of Volcano’s technology than the company has managed itself. Volcano leads the market in both intravascular ultrasound and fractional flow reserve (FFR) technology, both of which are used to identifying blockages in blood vessels and guide stent placement.
As a specialised, relatively high-growth company, Volcano fits the criteria EP Vantage set out last month for the next big deal, except in one particular: that analysis only covered companies whose medtech sales topped $1bn (The next medtech megamerger?, November 5, 2014).
Volcano may be small in terms of sales – it made $393m last year – but it should improve Philips’ reach into the all-important hospital sector. Having a wide range of products is an increasingly important strategy as hospitals seek bulk suppliers to keep their own costs down. Moreover, Volcano’s technology works with Philip’s imaging systems.
The timing of the move is interesting. Just over a year ago, Volcano’s management was under pressure from the investment fund Engaged Capital, which demanded that the company repurchase $200m-worth of shares; Volcano complied in early December (Investor activism erupts at Volcano, November 6, 2013).
However, any benefit from this was fleeting. In August this year Volcano reported poor second-quarter results with revenues missing consensus expectations. Worse, management downgraded the 2014 revenue outlook. The shares tanked 22% to around $13 and have not recovered.
There was little to suggest that Volcano was on the cusp of rocketing back, so it is possible that if Philips had waited a little longer it could have paid even less than it did.
But according to Philips, it was not the only company interested in putting Volcano out of its misery – it had to jump when it did. And buying Volcano ties in with Philips’s new strategy: in autumn the company said it would sell off its lighting business to focus on the higher growth area of healthcare.
Volcano's top-line is currently expected to grow at 4.3% a year to 2020, according to EvaluateMedTech. Philips no doubt hopes to improve on this, as well as growing profits through the usual efficiencies. It says it has identified sales and costs synergies and will also be able to introduce its own technology through Volcano’s distribution network – Volcano’s catheter-based technologies are largely disposable unlike Philips’ imaging systems, so its sales reps visit surgeries and hospitals more frequently.
The transaction is expected to be accretive to Philips’ earnings by 2017.
Execution will be key to achieving all this. Only if Philips turns Volcano’s sliding sales around can it be said to have obtained a bargain.