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Acquisition Proposal Memo for Johnson & Johnson

Paper Type: Free Assignment Study Level: University / Undergraduate
Wordcount: 2452 words Published: 27th Apr 2020

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The M&A analyst team of Johnson & Johnson are proposing the acquisition of Baxter International, Inc., a Medical Instrument and Supplies company.  The team will provide an industry overview including the industry’s projected growth and profitability, factors that may impede success, major competitors, and product liability.  The team will also provide a corporate overview of Baxter and a general outlook of Baxter’s health.

Keywords:  healthcare, M&A, Johnson & Johnson, Baxter

Executive Summary

The Johnson & Johnson M&A analyst team is requesting additional resources to further investigate the acquisition of Baxter International, Inc.  The addition of this enterprise will position Johnson & Johnson as a leading company in the Healthcare industry.  The combined entity is estimated to achieve annual net sales of $92 billion and improve the company’s competitive advantage by increasing global economies of scale.  Equally important, Johnson & Johnson’s product portfolio will expand, foster diversification, and reduce risk in the ongoing evolution of the healthcare industry.

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While Johnson & Johnson offers a variety of consumer, pharmaceutical, and medical devices, Baxter’s portfolio specializes in long-term chronic illness indications for use.  Most notably, Baxter is driving the future of the industry with the ongoing development of tracking and reporting devices for chronic conditions that connect with modern mobile communication technology.  With Johnson & Johnson’s global consumer market share, there is great potential to command this emerging medical device connection.  Moreover, promote swift growth in the market in addition to bridging the tech environment into Johnson & Johnson services offerings.

Current Industry Overview

Baxter operates in the Healthcare sector and is classified in the Medical Products and Equipment industry.  The industry’s value is estimated at $180 billion with the United States owning the largest share globally.  The medical device industry is segmented into six main categories; dental equipment and supplies, electro-medical equipment, In-vitro diagnostics, radiation apparatuses, surgical & medical instruments, and surgical appliances & supplies.

The Medical Devices and Equipment market has displayed sustainable and strong growth during the past years.  By 2023, the market is anticipated to grow by 30%, increasing the US market share to $208 billion.  Long term, annual sales are predicted to increase by 5%, eventually reaching nearly $800 billion by the end of 2030.

Major growth and profitability considerations include the influx of M&A activities in the healthcare industry alone.  The ever increasing transactions have positively and negatively impacted the industry, but with extensive valuation and management, success is promising.  Most notably, the incorporation of medical technology is key and fostering the collaboration of technology and medical uses will further support Johnson & Johnson to maintain its leading advantage as a healthcare product and service provider.

Johnson & Johnson’s top competitors include Medtronic – $29.7 billion, GE Healthcare – $29.7 billion, Royal Philips – $16.3 billion, and Siemens Healthineers – $16.3 billion.  The remaining competitors make up 80% of the market and range from small to medium-sized entities with less than 50 employees.  As a larger corporation, Johnson & Johnson maintains the benefit of scale effects.  In this evolving industry, that is especially affected by healthcare cost cuts, economies of scale are critical.  Thus, M&A activities have become very important in establishing partnerships, placing superior products in the marketplace, lowering costs and

Corporate Overview


Analysis of Baxter shows it is one of the top companies in its industry and has many strengths that enable it to thrive in a highly competitive marketplace.  Baxter’s leading position in the market is a result of its product innovation, dealer community, robust distribution network, stable returns on capital expenditures, and a high level of customer satisfaction.  Their global product collection aids physicians to be more capable and effective in treating patients (Baxter, 2018).  The company receives 60% of its annual revenues from international sales facilitated by approximately 50 global manufacturing locations and 100 distributions centers.  Baxter’s Go-to-market strategy, a guide to customer interactions for established products, has proven to achieve a  competitive advantage.

As a leader in the medical device industry with a history of strong service and invention, Baxter also exhibits consistent financial performance.  In 2018, Baxter generated $2.1 billion in operating cash flow, increased the annual dividend rate by 19%, and repurchased over $2.4 billion in shares through a repurchase plan.  For 2019, the company expects adjusted earnings from continuing operations of $3.27 to $3.35 per share.  The company also anticipated sales growth of 3% on a constant currency basis and between 3-4% on an operational basis. (Baxter Reports, 2019).

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Baxter has experienced liability issues as a result of regulatory inefficiencies in various manufacturing plants.  There have also been claims of varied safety violations, environmental breaches, and products being advertised with inflated capabilities.  These claims can be mitigated with enhanced internal controls, management oversight, and environmental cleanup of abandoned production sites.  The following is a table of the top primary offenses against Baxter (Violation Tracker. Retrieved from https://violationtracker.goodjobsfirst.org/parent/baxter-international):

Top Primary Offenses Penalty Total Number of Records
False Claims Act $403,100,000 2
Drug of medical equipment safety violation $18,158,000 1
Wage and hour violation $2,695,676 1
HHS civil monetary penalties $346,000 1
Environmental violation $59,455 2
Nuclear safety violation $44,400 1
Workspace safety and health violation $7,000 1


Johnson & Johnson and Baxter International are major businesses that provide products in the healthcare industry.  Johnson & Johnson offers consumer healthcare products, pharmaceutical goods, and medical devices; whereas, Baxter’s focus is on the delivery of medical instruments and supplies.  Although both companies are classified in the same industry, their product offerings are in different areas and acquiring Baxter will further diversify Johnson & Johnson’s product offerings.

The concentric merge will improve the target company’s performance as well as strengthen Johnson & Johnson’s economies of scale.  The risk of venturing into surgical and medical instrument product offerings will be greatly mitigated.  The combined companies will capture a larger market share and have access to resources and consumers that were not previously available.  The diversification of products may encourage the sale of other products and therefore offer a one-stop shopping experience for consumers, like usual digital convenience, and provide discount opportunities on voluminous purchases, encouraging faster sales growth compared to its competition.

Baxter has recorded consistent sales for the past five years and increasing operating income.  Equally important, the estimated P/E multiple of Baxter International for the operating years 2018 and 2017 were 21.62 and 49.57 respectively.  Compared to the industry average of 59.67, Baxter International is undervalued.  This multiple is further supported by the very low P/B multiple of 0.69 and 0.48 for the years 2018 and 2017 respectively (EBITDA Multiples by Industry. (2019, June 14). Retrieved July 18, 2019, from https://www.equidam.com/ebitda-multiples-trbc-industries/.


Due to the uncertain nature of medical devices, lawsuits are a constant threat in the healthcare industry.  Currently, Baxter is not experiencing open or pending legal claims which is auspicious considering the ever-changing environment of the industry.  Bearing in mind, government regulations and evolving technologies will impose ongoing risk.  Most notably, new legislations are imposed at an overwhelming rate to ensure public safety.  The significant amount of M&A activities also poses a threat in this industry because evolution with the changing environment is vital for continued success.


Acquiring Baxter International, Inc. appears to be very encouraging.  Baxter’s different product indications will diversify Johnson & Johnson’s medical device segment and provide access to additional resources and consumers.  Additionally, Baxter’s ongoing R&D efforts will have the potential to reach markets sooner with the support of Johnson & Johnson’s capital advantage.  The concentric merger will increase economies of scale and capture more global market share.  Through meticulous planning, strong management, and attentive valuation, the analyst team believes this will be a good fit for Johnson & Johnson.  Thank you for your consideration.



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