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The Rationale behind Johnson & Johnson’s Acquisition of Abbott Medical Optics

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Overview

On September 16, 2016, Johnson & Johnson (JNJ) announced the acquisition of Abbott Medical Optics, a subsidiary of Abbott Laboratories (ABT). After this news, JNJ’s stock fell ~0.3% during the day, whereas the shares of Abbott Laboratories rose ~2%.

The acquisition will be a cash deal worth ~$4.3 billion. The deal is expected to close in the first quarter of 2017 and is estimated to be immediately accretive to JNJ’s adjusted EPS (earnings per share). Investors can gain diversified exposure to JNJ by investing in the iShares S&P 500 Growth ETF (IVW). JNJ accounts for ~1.7% of IVW’s total holdings.

Abbott Medical Optics registered strong sales of around $1.1 billion in 2015 and is a profitable business segment of Abbott Laboratories. The company’s product segments include Consumer Eye Health, Cataract Surgery, and Laser Refractive Surgery.

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Deal rationale

The acquisition is expected to be advantageous for both Johnson & Johnson and Abbott Laboratories. Abbott Laboratories is already undergoing consolidation, focusing on its core business segments to improve operational efficiencies and the company’s profitability. Abbott’s Medical Optics business wasn’t aligned to its core business areas and thus is an advantageous move for the company as it moves ahead with its big acquisition of St. Jude Medical (STJ) and Alere (ALR) by the end of 2016.

Ashley McEvoy, JNJ’s Vision Care Chair, stated: “Eye health is one of the largest, fastest growing and most underserved segments in health care today. With the acquisition of Abbott Medical Optics’ strong and differentiated surgical ophthalmic portfolio, coupled with our world-leading Acuvue contact lens business, we will become a more broad-based leader in vision care. Importantly, with this acquisition, we will enter cataract surgery—one of the most commonly performed surgeries and the number one cause of preventable blindness.”

In the next part, we’ll look at JNJ’s latest therapy approval by the FDA.

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