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Abbott Laboratories After St. Jude Medical - Good Or Bad?

Summary

Abbott's acquisition spree isn't as solid as I would like to see.

I like the St. Jude acquisition, but the Alere acquisition? Not so much.

The sharp drop in share price has left me closer on the "buy" side of the fence.

Abbott Laboratories (NYSE:ABT) is on an acquisition spree, but the most recently announced deal to buy St. Jude Medical (NYSE:STJ) didn't seem to be too popular with the market. Shares have shed over 10% of their value since the deal was announced on Thursday. There seems to be some uncertainty over the Alere (NYSE:ALR) deal as well, which I personally think could be a positive if it falls through. The sharp drop in Abbott's share price was sudden, but it may have created a long-term opportunity as well.

The Alere deal - I don't like it

Fellow contributor Paul Nouri wrote a solid article detailing why the Alere deal may be destructive to Abbott shareholders' wealth. I'd like to also opine that I'm no fan of the deal either.

Looking at Alere, I can see why Abbott might want it superficially, especially for its point-of-care diagnostic testing. Looking at the numbers, though, I don't like the deal. Alere is loaded with debt, and taking a glance on Morningstar, its return on invested capital hit a high peak of only 2.35% in fiscal 2014. This compares to Abbott's ROIC of around 15% for fiscal 2015. However, Abbott achieved ROIC of only 6.74% in 2013 and 7.64% in 2014, but we can see that the trend has been towards improvement post the AbbVie (NYSE:ABBV) split.

Abbott also generates better cash flow in my opinion, with free cash flow as a percentage of sales ranging between 9% to a little over 12% post AbbVie. Alere only converts about $0.05 of every $1 into free cash flow.

Now, to make the deal even foggier, there appears to be turbulence between the two companies. Abbott apparently has some concerns about the deal, attempting to...


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