Abbott buys Advanced Medical Optics

Key Points

Advanced Medical Optics (AMO), the Allergan spin-off that went on to become one of the leading publicly traded companies in ophthalmology, will become part of Abbott Laboratories Inc. in a $2.8 billion acquisition.

"The acquisition of AMO strengthens and expands Abbott's medical device business, adding a market-leading and sustainable new growth platform with more than $1 billion in annualized sales," Dr. Capek told investment analysts in a Jan. 12 conference call. "AMO's business is not only geographically diverse but diverse in and of itself, participating in three segments of the large and growing vision-care market."

Abbott, which has not had business in the ophthalmology space previously, will benefit from AMO's market-leading positions and wisely keeps Mazzo in place as its leader, said Christopher Cooley, a Cleveland-based senior analyst with FTN Midwest Securities Corp.

Abbott will pay $22 cash per share and assume another $1.4 billion in debt. On the Friday before the Jan. 12 announcement, stocks closed at $8.85, so the deal represents a 150% premium for shareholders. Shares had traded at $24.90 in June, however, and Cooley said the stock's value eventually would have rebounded, likely in the second half of 2010.

Dubious about debt

Some analysts have been dubious of the debt that AMO racked up as it made numerous and major acquisitions costing more than $2.5 billion from 2004 to 2007, Cooley noted. They began predicting, in late 2008, that AMO would violate existing debt covenants, and their predictions that the company would "subsequently not be able to gain access to the required capital took the shares to new lows," Cooley wrote in his Jan. 13 research note.

JP Morgan's Michael Weinstein indicated his reservations about the deal in Abbott's Jan. 12 conference call with investment analysts.

Weinstein said that AMO could be viewed as a "bit of a distressed asset" that has "obviously been through a tough period here the last couple of years," considering that the number of LASIK procedures has dropped significantly with the down-turned economy.

Attractive market

Abbott's Dr. Capek said he is confident that "the fundamentals of this market are attractive," given the aging population and AMO's number two share of the cataract market.

The company also has the top position in the LASIK market and is number three in lens-care solutions. That variety was attractive to Abbott, which also is seeking to diversify its health-care business, Abbott's Thomas C. Freyman, executive vice president, finance, and chief financial officer, told analysts on the call.

Cooley agreed that AMO had taken "appropriate actions" to make sure it would be well-positioned to capitalize on a rebounding market when the economy slowly recovers.

"In our opinion, Abbott is poised to acquire what we have long viewed as one of the most attractive ophthalmic assets along with a seasoned management team, the first executive management to recognize (formally) and address the melding of the traditional cataract and refractive markets, steeped in ophthalmic industry expertise at a compelling valuation," Cooley wrote in the research note.