3.1.11

2011 Med-Tech M&A: Deal Drivers for Middle Market Targets

2010 turned out to be a strong year for Med-Tech M&A – a healthy rebound from 2009 levels – with a string of deal announcements with total disclosed valuations of greater than $500 million. Pausing briefly during the economic turmoil, Med-Tech consolidators have resumed external corporate development, employing “best defense is good offense” tactics; and paying full M&A prices to enter or accelerate penetration of targeted new market segments.

This heightened deal activity has also included acquisitions where the buyer had made a previous investment to achieve an exclusive "first mover" option, while the asset advances through clinical, regulatory or commercial milestones. This has been a prominent strategy of St. Jude, Boston Scientific and Medtronic (MDT portfolio has 60 minority positions valued at $360 million).

With the capital markets reaching their highest levels since 2007, banks more willing to lend and an increasing number of companies seeking exits at acceptable valuations, we are optimistic this trend will continue in 2011.

For a list of 2010 Med-Tech acquisitions with total disclosed deal values greater than $500 million, click HERE.

Like many transactional markets, the “top-line” of the Med-Tech M&A market has exhibited volatility over the last few years, with total number of deals and disclosed value fluctuating significantly year-to-year. However, these fluctuations are largely driven by large cap transactions. As shown below, the number of large acquisitions can spike under the right circumstances and go dormant under others.

Conversely over a 10-year period, the sub-$100 million deal market has experienced more consistent volume. While economic conditions may periodically shut down the market for acquisitions greater than $100 million, “lower middle market” deals and those with undisclosed values (largely sub-$100 million in value), continue to get done with established transaction volume support levels. Note to reader: Compare 2008-2009 volumes in the graphs immediately above and below this paragraph.


Acquirors will not always be willing or able to effect larger strategic transactions (particularly public companies when their stock prices are under pressure), but smaller build-on/tuck-in acquisitions are simply considered an integral part of existing product/market strategies.
This segment of the M&A market is less cyclical for a number of practical reasons:
  • Straightforward deal rationales – Acquisitions are accretive in the near-term due to sales and marketing synergies, or the acquired technology enhances current product offerings and drives greater market penetration.
  • Small bets = manageable downside Even for larger acquirors, because smaller deals have a greater percentage of success, so not every acquisition needs to be a billion dollar opportunity to be an attractive M&A candidate.
  • More efficient R&D strategy Rather than bear high costs and uncertainties of early stage internal R&D projects, small acquisitions allow acquirors to outsource this role to entrepreneurs and venture capitalists, and pay for proven assets.
  • Less integration risk – Relative to larger, more complex businesses, small acquisitions can be added without a large allocation of company resources.
  • Larger universe of potential acquirors – For smaller targets, there is a greater number of suitors with a strategic rationale AND the required financial wherewithal.

For the owners/decision-makers of Med-Tech companies being groomed for eventual exits, there are several key thoughts we would offer as relevant for achieving a successful liquidity event:

  • Know the buyer universe, big and small – While a target may fit well with large, diversified Med-Tech consolidators, it is important to investigate smaller, lesser known companies who would view an acquisition as a transformational event. This includes sponsor-backed buyers, who are opportunistic and have good access to capital.
  • Strategic touch points establish credibility – Early and ongoing discussions with potential strategic buyers create a more receptive audience when a sale process is actually undertaken.
  • No substitute for commercial proof points – Whether a product is sold into the hospital, physician’s office or homecare market, its competitive advantages, reimbursement strategy and potential market ultimately prove out with compelling sales and growth.
  • Business model is critical to making the acquisition case – Valuation hinges on demonstrating that a product will be accretive given assumptions for manufacturing costs, scalability and reimbursement.
  • IP position is where deals often fall apart – A strong and focused IP portfolio is a must-have and will be highly scrutinized in the course of buyer due diligence.
  • Go-it-alone strategy and funding provide leverage – M&A cannot be "PLAN A". It is important to have a strategy that credibly finances build-out of the business infrastructure. Even in a competitive M&A process, a strategy of staying independent is an important source of negotiating leverage.
While markets will continue to fluctuate, we can be confident that the sub-$100 million Med-Tech M&A market will continue to provide exit opportunities for smaller companies.

Competition will continue to drive acquirors to seek growth and innovation through external M&A initiatives.