Growing With M&A

Like other companies, Cardinal Health hunkered down during the recession, putting its merger and acquisitions plans on hold. Now the company is in the midst of a major shopping spree, having spent more than $2 billion on three acquisitions announced over the past six months, including one in China.

But more than the recent upswing in the economy is fueling the hunt for strategic growth opportunities at the Columbus, Ohio-based provider of products, services and technology to the healthcare industry, which had $96 billion in 2009 revenue.

Treasury & Risk asked CFO Jeff Henderson to elaborate.

T&R: More than the recession had put your M&A strategy on the back burner. What heated it up?
Henderson: The big factor was the spinoff of our medical technology capital equipment business (CareFusion) to shareholders in August 2009. Completing the spinoff and repositioning the company to get it focused on the core healthcare service areas in which we compete took complete focus, and was the bigger determinant in our decision not to be active in M&A. Shortly thereafter, we identified key organic investment strategies to accelerate our growth, M&A being chief among them.

T&R: Give us the lowdown on the three acquisitions.
Henderson: They include Healthcare Solutions for $517 million, Kinray for $1.3 billion, and Zuellig Pharma China, a healthcare distribution business, for $470 million. The last one makes us the first company in our sector to be in China in a meaningful way. The Chinese healthcare industry is growing at a rapid pace as they go through a period of healthcare reform. Expectations are for it to grow at a compound annual rate of 20% through 2014--hence we view the market as a pretty important strategic platform for growth.

T&R: We've had our own healthcare reforms here in the United States. Do these help explain the other two acquisitions?
Henderson: The long-term fundamentals in our sector are very good, given the underlying demographic trends and expectations of increased utilization driven by the healthcare reforms. It's a good position to be in for any company in any industry. On the flip side, utilization in the last nine to 12 months has been sluggish because of the overall state of the economy. People are holding off on discretionary medical procedures, and long-term unemployment for some people has meant the end of COBRA and other forms of insurance, causing them to be more selective in the types of procedures they pursue. But, yes, the outlook for increased utilization is good.

T&R: How did you finance the various deals?
Henderson: Almost all of them were financed with 100% cash on the balance sheet rather than extensive financing. When we spun off CareFusion, we initially retained 20% of the shares. We then sold those off over the course of the following year, giving us access to $1 billion in capital. We also were generating cash, as the business was performing very well and we were managing the balance sheet. The capital provided the ammunition to pursue these strategic deals when they became available. Not that we wouldn't have been able to tap external markets--that has improved markedly since the relatively dark days of the crash of 2008.

T&R: Any other deals in the offing?
Henderson: Let me just say that when good acquisition candidates become available and fit our strategic growth priorities, we are all ears.

To read Jeff Henderson's profile as one of
T&R's 2009 CFOs to Watch, see Steering Through Troubled Times.

For a description of Cardinal Health's wellness program, see The Financial Virtues of Wellness.


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