Parks Associates Blog

Wednesday, January 21, 2009

Johnson and Johnson in an Acquisition Mood?

J&J, the world’s largest consumer and healthcare product company reported annual sales figures yesterday. CEO William Weldon told analysts that the company is prepared to make selected acquisitions to strengthen its position in the healthcare side. These are his words:

“This economic environment creates opportunities we may never see again, so we need to be in a position to go after them.”

To elaborate on his thoughts, Mr. Weldon indicated that two of the areas that the company is particularly interested in are health information technology companies and companies that specialize in wellness and disease prevention, as reported by the Wall Street Journal.

His words immediately caught my attention. As I am wrapping up my report Disease Management and Hi-Tech Adoption, I couldn’t agree more with his assessment. One of the key themes of the report is my view that the DM industry will see continued consolidation in the next few years with the number of third-party DM vendors dwindling. Acquirers can be outsiders to the DM industry, such as medical diagnostic device makers, health information technology vendors, drug stores, and established Web giants. We are also going to see more information technology adoption in the DM practices, some even at DM providers’ resistance. The result is a more integrated DM model with technology playing as the differentiation factor.

Who is most vulnerable at this time? Given J&J’s track record of acquiring industry leaders in their respective market segments, Healthways will be a perfect target given its DM expertise, diversified assets, and a strong management team. Falling from upper $50s to today’s closing price of less than $13, Healthways' market cap is less than $450 million. With $14 billion cash on its balance sheet, J&J can purchase Healthways without much impact on its debt obligation. The key barrier could be Healthways' board and management team, many being the founding members of the company thirty years ago. J&J might have to pay a bit premium in order to persuade Healthways' board.

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