The general rule for investors, and one that history bears out, is that you're supposed to avoid so-called serial acquirers. Growth from acquisitions can be volatile, and more than one would-be "roll-up" concept has gone down in flames when the pool of appealing targets dried up or the acquired pieces never quite fit together.
Yeah, well, there's also the idea that every rule has its exception, so let's take a look at IntegraLifeSciences'
As you might imagine, Integra expects to see some benefits from this purchase. Neurosurgery instruments such as Radionics' ultrasonic surgical aspirator and stereotactic surgery products will augment Integra's existing surgical product line, and the radiation therapy business will give Integra a new toehold in this very large market.
What I like best, though, is the price. Integra is paying only about 1.3 times sales for Radionics, which is pretty cheap in the medical-technology world, where you see most companies trade at three times sales -- or more. Yes, I know, price-to-sales is not the best valuation metric out there, but it's extremely common in the med-tech world and so provides a frame of reference. Even though Integra management is expecting Radionics' sales to drop by about 20% after the acquisition because of a switch to external distributors for sales, you're still talking about only 1.7 times trailing sales for a company that should fit in very smoothly with Integra's existing business.
But although this looks to be a savvy deal, investors should still be cautious. For a med-tech company, Integra has rather low margins, returns on assets, and return on equity. What's more, fairly modest organic growth is offset with a pretty robust valuation. Though I'm a big believer in neurology as an underserved medical niche, I'm an even bigger believer in the concept of "the right stock at the right price." Integra has good technology and perhaps a bright future, but the price isn't right for me today.
For more medical missives:
- Can Arrow International Straighten Up?
- ANSI's Got the Juice
- Back Pain for Shorts?
- Integra LifeSciences Strikes a Nerve
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).