As medical technology has evolved over the past two decades, medical devices have become important in the treatment of various illnesses and conditions. Because of this, medical device manufacturers have made tremendous profits, and have thus positioned their companies to be valuable in today’s business world. As a result, these companies are often viewed as favorable investments by other companies. This is evident in the recent purchase of DJO Global Inc. by Colfax Corporation, which spent $3.15 billion for the company.
While the purchase demonstrates the growing confidence many companies are placing in pursuing opportunities in the medical device industry, the purchase by Colfax has made many of its investors nervous about the shift in business strategy. After the purchase was announced, shares of Colfax fell by more than 15 percent, as investors worried about how Colfax would adjust from its emphasis on industrial processes and equipment to what will be an entirely new business path.
As the biggest deal ever for the company, Colfax plans to move away from its air and gas handling business, which deals primarily with making turbines and compressors for oil and gas companies. However, while many investors are nervous, those in charge of Colfax do have prior experience in the medical industry. In fact, the founders of Colfax, Steven and Mitchell Rales, along with Colfax CEO Matt Tretorola, all have prior experience as founders of medical company Danaher Corporation.
By deciding to emphasize the medical device business over its traditional base of industrial-era businesses, many analysts are concerned that Colfax may have abandoned its existing market too soon. However, according to CEO Matt Tretorola, moving in this direction will actually make the company stronger, since the medical device industry is viewed as a growing market that is less susceptible to cyclical activity.
Believing the market for medical devices will continue to grow as baby boomers become senior citizens, Colfax views the medical device industry as a high-margin, high-growth market that is poised for success in the years ahead. While Colfax’s air and gas handling business currently makes up more than 40 percent of its business, much of this is tied to various energy projects around the world. Therefore, since these projects are usually very large and costly, they are often delayed. When this occurs, revenues from these projects can be very unstable, making it difficult for Colfax to plan future projects.
To complete the deal to purchase DJO Global Inc., Colfax will use a combination of cash, debt, and equity. Due to the complexities associated with this deal, Colfax and DJO both have high-profile financial advisers working with them while the final details are completed. For Colfax, J.P. Morgan is in charge of supervising the deal, while DJO is relying on the advice of Goldman Sachs and Co., Credit Suisse, and Wells Fargo Securities LLC.
While overall most analysts believe this purchase will be beneficial to Colfax, there are still many concerns being expressed. One of these involves the numerous lawsuits that are being filed by patients for various problems associated with implantable filters and other similar units. However, as of now no lawsuits have been filed against DJO, which gives Colfax executives confidence that their purchase will pay off in the long-term. Nevertheless, analysts and investors are expected to remain nervous until the deal is completed and positive financial data proves the deal to be a success.
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