Tyco's Traffic Control in Healthcare
Edition: July 2001 - Vol 9 Number 07
Author: Rick Dana Barlow
When Tyco International Ltd. chief executive L. Dennis Koslowski branded healthcare a ''fragmented industry'' in the company's 1997 annual report to shareholders, he was issuing more of a corporate challenge than a condemnation, taking up a gauntlet that would prove to be a profitable venture for his company.
Despite its fragmentation, Koslowski added that healthcare ''nevertheless enjoys solid margins'' and talked about ''building a sizable position in the market for disposable medical supplies.'' The following year, Tyco began a shopping spree that scooped up some of the most recognizable names in healthcare, starting with Sherwood-Davis & Geck and U.S. Surgical.
Since 1997, the Pembroke, Bermuda-based diversified multinational conglomerate has managed to hitch together a truckload of acquisitions that has given the company a formidable presence in hospitals, surgery centers, physician practices and other healthcare facilities. The company's latest move involves the proposed $3.2 billion acquisition of C.R. Bard Inc., which will give Tyco longer tentacles into urological, peripheral vascular, oncological and specialty surgical products.
Still, Tyco's march into healthcare, which began seven years ago, leads many in the industry to wonder where the company is going and what it ultimately wants to achieve, aside from the obvious fiscal profits, of course. Executives at Tyco could not be reached for comment after failing to return repeated telephone calls. Even several group purchasing organization executives declined to be quoted directly, instead preferring anonymity to reflect on a company that's rather quickly becoming a larger player in their contract portfolios.
It's no secret that Tyco's basic strategy is to identify companies with greater profit potential that may be hamstrung by operational inefficiencies, buy them, strip out needless overhead and steer them on the path to making money again. Analysts revere Tyco for doing its homework upfront and formulating a detailed battle plan for profitability before it ever makes an offer. So far, it seems to be working healthcare being no exception.
''They've done a great job of consolidating certain segments of the medical market, but also a tremendous job of integrating their acquisitions, too,'' said John Strong, president, Consorta Inc., Rolling Meadows, IL. Strong cited Tyco's success in fusing U.S. Surgical Corp. with Davis & Geck and streamlining Kendall Healthcare and Sherwood Medical, too.
''Tyco's all about efficiency,'' acknowledged Joe Colonna, vice president of operations, Shared Services Healthcare Inc., Atlanta. ''The first thing they do when they buy somebody is they cut out the fat.'' Colonna noted that what tends to drag companies down is their inability to spot inefficiencies and continually streamline operations to cut costs because they're focused too much on making money.
''Companies that are good consolidators like Tyco can grab a boatload of money by streamlining operations, becoming more efficient and achieving economies of scale,'' Strong said. ''Tyco is very good at deciding what they need to sell or shut down after acquiring a company and pruning out products and services whose life cycle has passed and lowers earnings. Many companies aren't willing to divest what doesn't work.''
But Tyco's acquisitive nature in healthcare evokes questions about the big picture. What will the company end up with? When will it be done? Or more importantly, will it ever be done? GPO executives, both on and off the record grade Tyco's contract service performance with mixed marks. Some are pleased, while others remain ambivalent and the rest fall short of downright wrath.
Some chalk it up to Tyco's relatively limited experience working with healthcare facilities and trying to find the right structure to satisfy service demands cost effectively.
''When you streamline the way Tyco has, you're bound to have growing pains,'' Colonna said reassuringly. ''Some service levels have suffered as balls are dropped. They may miss some short-term opportunities. But healthcare is much less relationship-driven than it was five years ago.'' Shared Services has maintained a contractual relationship with Tyco for at least 10 years spanning several of its healthcare units, according to Colonna. ''It would almost be impossible not to have a contract with Tyco these days,'' he said. More than half of Shared Services purchasing volume with Tyco is funneled through U.S. Surgical, but that may change when they renegotiate the consolidated Mallinckrodt and Nellcor Puritan-Bennett contract, he noted.
At this point, Shared Services deals with Tyco healthcare companies as separate organizations but Colonna added that they're seeing more of a corporate national accounts strategy emerging that may integrate Tyco's healthcare and non-healthcare products under larger contracts.
''To our way of thinking, it's been pretty smooth,'' said Consorta's Strong. ''We have a lot of contracts with Tyco companies (approximately 17) and together they're a wonderful business partner. We've had a few brushes here and there, but it's been overwhelmingly positive.''
Still, one GPO executive who asked not to be identified said that Tyco continues to work out the bugs in national accounts, particularly as its corporate sales representatives have to handle more product lines and contractual relationships with which they may not be familiar as each new acquisition is integrated into operations. But that GPO executive lauded the national account reps on Tyco's payroll as ''scrappy, feet-in-the-street'' people who know what the field sales force is doing and are not confined to their ivory towers. ''They've taken the best of those companies they acquired and put them in top positions,'' he said.
AmeriNet Inc. bills itself as one of the first GPOs to work with a pre-Tyco U.S. Surgical among other contracts with ultimately acquired Tyco units and has experienced few problems, if any. ''I've not noticed that Tyco is any less willing to deal with us,'' said AmeriNet President Robert ''Bud'' Bowen. ''They recognize that they have built their business based on relationships with GPOs.''
Not everyone offers so positive a review. In fact, one GPO executive who requested anonymity so that he can repair the relationship, indicated that they experienced better service with the companies acquired by Tyco before they were acquired. ''In almost every case with the exception of one, our national accounts reps were replaced by individuals who didn't have a clue as to who we were,'' he said. ''It's not been a good experience for us at all. If they have any kind of corporate program in place for a group as diverse as we are, you'd never know it by me. Tyco seems to be having a difficult time dealing with multiple classes of trade.
''They've got tremendous potential if they can get it together, but based on what we've seen in the way they're doing business with us so far, it's not happening,'' he added. ''I'd love to get back on track with them.''
Assembling the puzzle
Michael LeConey, a New York-based securities analyst that has covered healthcare companies for nearly 30 years, repeatedly described Tyco's maneuvers with one word: Opportunistic. And the company seemingly has big plans.
How else could you describe a company that snatches financially troubled organizations at an average 25% premium over current market value with the stated goal of reversing their slides and making them securely profitable? ''Tyco's doing this because they're opportunistic,'' said LeConey, director of healthcare research at Gilford Securities. ''They're going for critical mass [in healthcare]. They're doing a strategy similar to Baxter by setting up a core product line and building upon that, starting with the products they need to have in place.''
LeConey acknowledged that Tyco has quickened its acquisition pace during the last few years. ''Healthcare is under a lot of pressure so there's a lot more opportunities available to [Tyco],'' he said. ''Hospitals are combining and HMOs are combining. Because the customers are bigger, the suppliers need to be bigger, too.'' LeConey fully expects the pace to continue at least for the next two years as Tyco builds a broad-based healthcare business.
If Tyco wants to stake its claim in healthcare, acquiring Bard gives the company ample opportunity. ''It's a shelf-space game, LeConey said. ''Bard is one of the five most recognized names in hospitals, excluding pharmaceuticals, and is the name in urology. The other four are Johnson & Johnson, Baxter, Becton Dickinson and Abbott. These are the names that have been there for decades.''
With Bard, Tyco burrows more deeply into two very profitable segments in healthcare at present cardiovascular and oncology. Indeed, Bard provides some ''premium-priced products,'' much like the two premium-priced and very profitable sharps safety and specimen collection product lines netted from Sage Products in 1999 and 2000, according to one GPO chief executive who declined to be identified because his organization has a significant contractual relationship with many of Tyco's healthcare units. ''Tyco seems to be heading upstream for the higher-margin business to offset the low-margin businesses it has acquired over the years,'' he said.
But the Bard acquisition may raise the specter of a competitive challenge in urology, at least in the eyes of the Federal Trade Commission, which Tyco hopes will approve the transaction by the fourth quarter of 2001. Because Tyco's Kendall unit the company's oldest in healthcare already maintains notable market share in urological products, observers wonder how the FTC will react and which product lines will Tyco be forced to jettison to seal the Bard deal. Will the company divest Kendall's urological line and maybe Sherwood-Davis & Geck's to get all of Bard and its research-and-development operations or will it divest Bard's significant urological line to retain Kendall's private-labeling program?
Another key question involves Bard's newly minted third-party logistics relationship with distributor Owens & Minor Inc. (For a reference to Owens & Minor's ''direct-free'' logistics management program for manufacturers, see May 2001 Repertoire Magazine,
''The reality is that it's still too early to tell whether Tyco or its amalgamation of companies will go in a different direction,'' said Christopher McFadden, vice president of equity research at Goldman Sachs, New York. ''The earliest indications from Bard regarding its 3PL relationship with Owens & Minor is that it will continue.'' But McFadden tempered that observation by noting that ''no facilities have been built and no monies have been spent yet.''
Still, the more companies Tyco adds to its healthcare puzzle, the more obvious gaps remain to be filled. Analysts and GPO executives almost unanimously point to several areas that merit watching for future Tyco activity: Orthopedics and pharmaceuticals.
Rick Dana Barlow is a Schaumburg, IL-based contributing editor to Repertoire who initially thought of Tyco in 1994 as the company that made his childhood-era electric-train set. Barlow can be reached via e-mail at email@example.com.