The single worst word in the business lexicon? "Synergy." While it definitely has its uses, this term has also become empire-making CEOs' favorite justification for countless bad acquisitions. So when dental supply maker Dentsply (Nasdaq: XRAY) won the bidding for AstraZeneca's (NYSE: AZN) Astra Tech division and didn't include "synergy" anywhere in the deal's strategic rationale, investors must have flashed their pearly whites.
Much better phrases do show up in the $1.8 billion deal: "powerful cash flow generator" and "accretive to adjusted earnings." As in immediately accretive. Dentsply estimates the deal will add between $0.12 and $0.17 per share this year, and between $0.30 and $0.40 per share by year three of the combined company. Dentsply's top line should grow by 25%, to about $2.8 billion, as it becomes the third-largest player in the fast-growing dental implant segment.
Both companies' shareholders smiled upon the deal, even though the final price came in slightly lower than analysts estimated. AstraZeneca appears to be paring down its wide-ranging health care conglomerate, creating a more focused drug developer. For Big Pharma companies fearing the patent cliff -- and Astra has one of the steepest -- raising capital from asset sales and doubling down on a successful drug pipeline has become an increasingly legitimate strategy. The same logic fueled rumors of a potential Pfizer (NYSE: PFE) break-up.
While I understand that approach, drug companies' pipelines have looked more like black holes for the better part of a decade. Money goes in, but nothing ever seems to come out; for every Yervoy, which Bristol-Myers Squibb (NYSE: BMY) touts as proof that the process works, there have been countless flops. And whenever a drug company spins off a division, the value created for shareholders appears to walk out the door with it. For example, both of Bristol's spinoffs, Mead Johnson Nutrition (NYSE: MJN) and Zimmer (NYSE: ZMH), have wildly outperformed their former parent company.
A laser-focused AstraZeneca may be able to find the next big drug blockbusters of the future. However, if it doesn't, things will get very, very ugly. If I had to choose between AstraZeneca and Dentsply, I'd definitely invest in the latter.
