Harvesting ◾ 355
trend in the number of coronary artery bypass (CABG) procedures, which
started in 1996. In 1996, a revolutionary and disruptive technology made its
debut: coronary artery stents, implanted via a minimally invasive percutane-
ous procedure. There had been a dramatic drop in the rate of heart bypass
procedures performed in the U.S. over the last decade, even though more
hospitals were offering open-heart surgery.
15.8.2 Open Heart Procedures
Since its introduction in the mid-1960s, CABG had become the most fre-
quently performed surgical heart procedure. CABG performed miracles for
the millions of patients suffering from atherosclerotic coronary artery dis-
ease. However, CABG required opening the patient’s chest in a 4- to 6-hour
procedure, kept patients in the hospital for nearly a week, and had several
troubling side effects.
In contrast, coronary stents were implanted by accessing an artery in the
groin, most procedures required between 45 and 60 minutes, and the patients
were discharged on either the same day or the day subsequent to the proce-
dure. Stents revolutionized coronary artery revascularization, displacing cardio-
pulmonary CABG procedures nearly overnight. This can be seen in Figure15.11,
which shows the dramatic decline of CABG procedures starting in 1996, the
year stents were introduced into the interventional cardiology marketplace.
Gish’s sales declined in tandem with the rest of the decline in cardiopul-
monary bypass procedures. The entire industry was in deep decline, but
Gish suffered the most by being the smallest participant. Other industry
players, such as Medtronic, Terumo, and Sorin were much larger compa-
nies, and were better able to withstand steep sales declines in one of their
divisions. However, Gish was heavily dependent on CABG procedures, and
thus proportionately most susceptible to market declines. By 2002, Gish
was nearly bankrupt on yearly sales of approximately $17 million per year.
Moreover, the future looked very bleak as seen in Figure15.12.
15.8.3 CardioTech as the White Knight
With bad news like this, why would CardioTech want to acquire Gish? For
several reasons:
◾ Gish management payroll was heavily bloated with highly paid execu-
tives who contributed very little.
◾ Gish required leadership, not management skills.
356 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
◾ At $17 million per year of sales, it should be operationally protable.
◾ Gish needed innovation. This took the form of a novel antithrombotic
coating, as required by industry.
◾ Gish needed to expand into the Asian market.
◾ Gish agreed to be acquired with CardioTech stock.
If CardioTech was able to consummate this acquisition and make
the necessary management and technical changes (remember culture?),
then CardioTech would emerge with $21 million in sales and become
190
180
170
160
150
1,050
Number of hospital
sou
sands of procedures
Annual Number of coronary Artery Bypass Graft (CABG) Procedures and Number
of Hospitals
Performing CABG in e United States, 1992–2003
Hospitals
Procedures
1,000
950
900
850
1992 1994 1996 1998 2000 2002
Figure 15.11 Decline in CABG procedures—Due to the introduction of minimally
invasive stent procedures in 1996, the number of CBG procedures suffered a huge
decline.
Predicted Trends – CABG procedures utilizing
cardiopulmonary bypass equipment
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2000 2001 2002 2003 2004 2005 2006 2007
CABG
Figure 15.12 Predicted trends—With the decline in CABG surgeries, the sales of
cardiopulmonary bypass equipment declined correspondingly.
Harvesting ◾ 357
operationally protable. The technical term for a nancial transaction of
this type is “accretive.” Accretive is an acquisition that increases a publicly
traded company’s earnings per share. An accretive acquisition occurs when
the price-earnings ratio of the acquiring rm is greater than that of the tar-
get rm. This means that the target rm’s earnings are likely strong; this is
often seen as a good investment. An accretive acquisition usually results in a
higher share price for the combined company.
9
CardioTech’s founder and CEO, Dr. Michael Szycher, was an old hand at
accretive acquisitions, having been “trained” at Thermo Electron in many
accretive acquisitions. Together with his CFO David Volpe, and a terric law
rm, Ellenoff Grossman & Schole LLP of New York, they set out “to make
it happen.” In the meantime, the joke among Wall Street bankers was that
Dr. Szycher “never saw an acquisition he did not like.”
15.8.4 Risk Factors SWOT Analysis of the Gish Acquisition
The CardioTech acquisition team developed a process for potential acquisi-
tion and SWOT analysis, shown in Figures15.13 and 15.14.
15.8.4.1 Strengths
◾ Gish enjoyed a well-known brand name in the industry, and was
known for high-quality products.
Prepare action
and strategy
Review SWOT
and
brainstorm
Conduct
Internal/External
analysis
SWOT Process for Potential
Acquisition
GO/NO GO
Figure 15.13 SWOT process—The go/no go decision tree for any potential
acquisition.
358 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
◾ International net revenues accounted for only 19% of Gish’s total net
sales in scal 2002 and 2001. CardioTech planned a major push to
increase international sales revenues to 25% of net sales within 2 years
of acquisition, using native distributors.
◾ CardioTech gained a huge FDA-approved clean room facility, and a
large warehouse plus a distribution facility in western U.S.
◾ CardioTech gained a large pool of highly trained personnel in manufac-
turing, regulatory, and sales.
◾ Gish traditionally had committed employees. Many individuals in the
manufacturing area had been with the company for many years. As a
result of the merger, CardioTech would acquire 116 highly trained employ-
ees based at Gish’s headquarters in Rancho Santa Margarita, California.
◾ Future growth would require CardioTech to successfully hire, train,
motivate, and manage its employees. In addition, CardioTech’s con-
tinued growth and the evolution of its business plan would require
signicant additional management and technical and administrative
resources.
◾ Sales of medical devices outside of the U.S. are subject to international
regulatory requirements that vary from country to country. The time
required to obtain approval for sales internationally is much shorter
than that required for FDA clearance or approval, and the requirements
Gish SWOT Analysis
Strengths
Large, established market
Aging population
Scientic progress
Entry new markets
Weaknesses
Regulatory environment
Undercapitalized
Decreasing markets
Globalization
Opportunities
Experienced personnel
Innovation
Quick response
Tailoring products
reats
Large competitors
Lower reimbursements
Cheap imports
Alternative therapies
Figure 15.14 Gish SWOT analysis—Strategic analysis for the potential acquisition of
Gish, Inc.
Harvesting ◾ 359
may differ. Gish entered into distribution agreements for the foreign
distribution of its products. These agreements are an encouraging sign
of possible new sales.
15.8.4.2 Weaknesses
◾ Limited nancial resources. Several large companies offered devices that
directly competed with devices manufactured by Gish, including Jostra-
Bentley, COBE Cardiovascular, a division of Sorin Biomedica, Terumo,
Medtronic,Inc., and Stryker Surgical. Most of Gish’s competitors have
longer operating histories and signicantly greater nancial, technical,
research, marketing, sales, distribution, and other resources than Gish
has. In addition, Gish’s competitors had greater name recognition than
Gish and frequently offered discounts as a competitive tactic.
◾ Liabilities. Gish’s acquisition exposed CardioTech to potential product
liability and other liability risks inherent in the development, testing,
manufacturing, and direct marketing of medical products.
◾ Limited international sales. International net revenues accounted for
approximately 19% of Gish’s total net sales in scal 2002 and 2001.
International sales are subject to a number of inherent risks, including
the impact of possible recessionary environments in economies outside
the U.S., unexpected changes in regulatory requirements, and uctua-
tions in exchange rates of local currencies in markets where Gish sells
its products. While Gish denominated all of its international sales in
U.S. dollars, a relative strengthening in the U.S. dollar would increase
the effective cost of the company’s products to international customers.
◾ Organizational disruption. The potential disruption of the combined
organizations’ ongoing business and distraction of its management from
the day-to-day operations of the combined organization.
◾ Integration of cultures. The combined organization may not succeed in
addressing these risks or any other problems encountered in connection
with the merger. The inability to integrate the operations, technology,
and personnel of CardioTech and Gish successfully, or any signicant
delay in achieving integration, would have an adverse effect on the
combined organization after the merger and, as a result, on the corpo-
rate protability and market price of CardioTech common stock.
◾ Impact on Gish employees. Because of Gish’s change in ownership,
current and prospective Gish employees would experience uncer-
tainty about their future roles within the combined organization. This
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.