Becton Dickinson's $24 Billion Megadeal Won't Bite

(Bloomberg Gadfly) -- Two years ago, hospital supplier Becton Dickinson & Co. joined the health-care industry merger wave with a $12 billion deal for CareFusion Corp. The transaction went so well that it's going for another megadeal, this time double the size. 

Franklin Lakes, New Jersey-based Becton announced Sunday that it's offering some $24 billion (including net debt) to acquire C.R. Bard Inc., whose headquarters are less than 40 miles away in Murray Hill, New Jersey. Becton will be paying about 70 percent of the cost in cash, which will cause its leverage to spike back up and its investment-grade credit rating to potentially drop a notch (ratings companies have put Becton under review for a downgrade). Early reaction to the deal was negative, and its shares sagged about 4 percent in early trading Monday. 

But to ease any doubts about the company's increasingly ambitious M&A strategy, its management -- led by Chairman and CEO Vincent Forlenza -- is saying, "Look, we've done it before." It can point to the successful integration of CareFusion, which has delivered better-than-expected synergies, as Becton worked to quickly pay down debt. In fact, following the industry's years-long (and at times overheated) acquisition spree, which engulfed everyone from drugmakers to hospital chains, Forlenza's dealmaking may stand out. He's neither overpaid nor over-promised. And so even a $24 billion undertaking shouldn't jeopardize its reputation as a safe spot for investors. 

The latest purchase is by no means cheap, with Becton offering more than 20 times C.R. Bard's trailing 12-month Ebitda. But offsetting that are expectations for a 300 basis point improvement in gross margins in fiscal 2018, an attractive feature of the deal as hospital consolidation creates pricing pressure for suppliers. Becton also predicts annual cost savings of $300 million by fiscal 2020. And while there is uncertainty as President Donald Trump seeks to overhaul health care, Becton won't feel the pinch as much as peers more closely tied to research labs supported by government funding. 

The two businesses also provide complementary products in medication delivery (think syringes, intravenous catheters, infusion pumps), and Bard will expand Becton's offerings to prevent hospital-acquired infections. With nearly half Becton's revenue generated outside the U.S., it may be able to enhance Bard's international presence. While one-third of Bard's sales force is in emerging markets, only 10 percent of its sales come from those geographies, according to a report by Brian Weinstein, an analyst at William Blair & Co.

Forlenza is now being called a serial dealmaker -- but there's an important distinction to be made between his winning track record and others in the industry who earned that moniker, such as Mike Pearson, the former leader of Valeant Pharmaceuticals International Inc. whose spate of irresponsible transactions nearly destroyed the drugmaker. 

Becton shareholders may yet need more convincing, but if history's any guide, they'll be applauding Forlenza once again. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.