Strategic and financial investors are looking desperately for interesting targets in the medical devices area. For businesses willing to sell, this opens a window of opportunity.
These are good times for corporate sellers:
A recent study by Aquin, a German M&A consultancy, reveals that the number of M&A transactions in the medical devices industry has increased dramatically in recent months. While in the four years between 2010 and 2013 the annual number of transactions in the German speaking countries averaged at around 55, the number doubled in 2014 to more than 100. For the current year – that promises the project pipeline – a similar number of M&A transactions is being expected.
Christoph Riedel, associate at Aquin, identifies several reasons for this development at this year’s Medtec Europe: Firstly, many industry giants face an increasingly strong pressure to innovate. In this environment, businesses must decide whether to develop new products or technologies by themselves or even buy it on the market. More and more businesses decide in favor to buy, says Riedel.
In addition, fierce competition arises from financial investors. Due to the global low interest rate environment private equity, firms are being forced to search for good yielding investments opportunities. That’s why it happens more and more that financial and strategic investors engage in a bidding war for interesting targets. “In the past, the number of targets in the medical device sector being acquired by strategic and by financial investors were almost equal. Today financial investors are clearly ahead”, says Riedel. In the German speaking countries, financial investors were responsible for 90 percent of all M&A transactions.
As a result, there is a substantial increase in prices for the targets. Because of the heterogeneous market structure of the medical devices industry average numbers are difficult to determine. But for Riedel, there are no doubts that the multiples buyers pay for interesting targets in the industry have risen significantly in recent months. “In high-tech sub-sectors buyers are willing to pay up to twenty times the operating profit,” says Riedel. Traditionally, strategic investors were able to pay the highest prices. But nowadays, this rule does no longer applies.
Businesses that are looking for a buyer can improve their chances if they consider important points, advises Riedel. Investors are looking for niche experts. The prospects of a successful exit improve, the greater the expertise in a particular sector is. Furthermore, products or technologies should have reached a stadium where sales are being generated yet. “Buyers are looking meticulously on the clinical and financial data. In these areas, emphasis should be placed on quality assurance”, Riedel advises. The same applies for the whole field of intellectual property like patent protection for example.
Financial investors also appreciate if a second-level seniority exists. This ensures that operations can continue if the founder leaves the company during the sale. And last but not least is the highest price is not always the best deal: “At least as important are structure and terms of the transaction,” says Riedel.
Posted in Medical Venture Capital by Thomas Klein on April 22, 2015