RPT-BREAKINGVIEWS-Boston Scientific deal is too rich for its blood

By Robert Cyran

NEW YORK, Jan 15 (Reuters Breakingviews) - To justify its latest mega-deal, Boston Scientific BSX.N will soon be reaching for a defibrillator. The medical device manufacturer is paying $15 billion to buy Penumbra, whose products help remove blood clots, to beef up its cardiovascular portfolio. Bigger companies typically improve sales of smaller acquired companies, but in this case the price tag induces angina.

Short-term prospects certainly don't condone the transaction for Boston Scientific. Penumbra PEN.N is expected to generate about $325 million of operating profit in 2027, using estimates gathered by LSEG. The buyer also anticipates $200 million of cost savings from the merger. Tax the combined figure at the statutory corporate rate, and the implied return on investment result is only about 3%, according to Breakingviews calculations.

Furthermore, big M&A often goes awry, as Boston Scientific knows all too well. Two decades ago, it bought Guidant and its implantable defibrillator business for $27 billion. The stent business slowed, however, and the new unit was plagued by manufacturing and legal problems. The debt taken on to consummate the overpriced deal weighed heavy on the company for years, decimating its stock price.

Even so, size and reach matter in the medical device industry. Plug a promising new gizmo into a larger company and growth can rumble on for a while. Boston Scientific, J&J JNJ.N and others have relationships with big hospital chains domestically and sales forces worldwide. Overseas expansion, in particular, is a big opportunity for Penumbra.

There's precedent for success, too. J&J’s $17 billion purchase of Abiomed in 2022 and its $13 billion Shockwave deal in 2024 also looked pricey. Both have been strongly increasing sales and show no signs of slowing, suggesting it’s possible for Penumbra to grow into its valuation.

Its revenue should reach about $1.4 billion this year. Assume it rises 20% annually over the next five years and improves its operating profit margin to 33%. If so, Boston Scientific's return would be a more reasonable 7%.

For now, skepticism is warranted, helping explain why Boston Scientific lost more than $6 billion of market value after it unveiled the deal on Thursday. The promise of turbocharged growth often involves M&A that's too rich for the buyer's blood.

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CONTEXT NEWS

Medical device maker Boston Scientific said on January 15 it had agreed to buy Penumbra for $14.5 billion, including net cash, to enhance its cardiovascular product line.

Under terms of the deal, Boston Scientific will pay $374 for each Penumbra share, a 19% premium to the January 14 closing price. The seller's stockholders can choose to receive cash or 3.8721 Boston Scientific shares for each Penumbra share, subject to proration, so that 73% is in cash and the rest in shares.

Penumbra is expected to generate about $1.4 billion in revenue for 2025, largely from manufacturing devices used in minimally invasive vascular procedures, including removing blood clots.

Perella Weinberg is advising Penumbra while no financial adviser for Boston Scientific was listed on the press release.