Investors could have bought St. Jude Medical stock in the 1977 initial public offering at a split-adjusted price that works out to be about 2 cents a share.
The big deal announced last week by Abbott, acquiring St. Jude Medical for cash and stock, put a value on St. Jude shares of $85.
It’s not easy to top that kind of capital gain, so why doesn’t this feel like a moment to celebrate? Could it be that it’s disappointing to see another of Minnesota’s homegrown Fortune 500 companies owned by somebody else?
“That was my first word, too. Disappointing,” said veteran Wayzata money manager Richard W. Perkins, a few hours after Little Canada-based St. Jude said it would be bought. “I guess I’m happy I own it.”
As disappointing as it is, there’s nothing unique about big companies in Minnesota getting gobbled up. It’s difficult to think of a company here of any size that isn’t in a consolidating industry. It’s the same, of course, for companies based in Chicago or anywhere else.
What made the St. Jude sale a little unsettling is that it followed, by barely a month, news that Minneapolis-based Valspar would be acquired by the Sherwin-Williams Co., knocking another Minnesota-based company off the list of corporate giants.
Valspar has been a solid corporate citizen, yet few companies seem as uniquely Minnesotan as St. Jude Medical.
Founder Manny Villafana is a member of the Minnesota Business Hall of Fame. The thinking behind the first product, a leapfrog design for a mechanical human heart valve replacement, came from the University of Minnesota. The university’s hospital is where the first St. Jude valve was implanted in the fall of 1977.
St. Jude got its funding here, too, yet another deal that emerged out of the vibrant start-up scene of Minneapolis. In Milwaukee or Chicago at the time, it just wouldn’t have been possible to bring a company like St. Jude Medical public the way the old Craig-Hallum did here — pitching investors not much more than a hopeful-sounding business plan and the reputation of St. Jude’s founder.
St. Jude Medical, named for the patron saint of impossible causes, persevered through some difficult times, too. It was one of the first medical device companies to navigate the rules of the new Food and Drug Administration, a journey that just about killed the company in its infancy.
Later it ended up in life-threatening lawsuits with the supplier of the carbon material used to make its heart valves. That’s when Perkins, of Perkins Capital Management, bought his first shares.
From that near-death experience in the mid 1980s, St. Jude rose to become a leading industry consolidator itself.
It’s a similar story for paint and coatings company Valspar. Glance through its history and you quickly realize that Valspar was its industry’s consolidator, including the 1970 merger with Minnesota Paints that established the headquarters here in Minneapolis.
The list of companies that then got merged into the new Valspar is a long one, some with good old-fashioned sounding names like Phelan Faust Paint and Speed-O-Lac Chemical.
What’s important to understand is that there is nothing all that noteworthy about what happened to St. Jude or Valspar, from buying company after company to later getting acquired themselves. Consultants from A.T. Kearney, writing more than a dozen years ago in the Harvard Business Review, took a long look at more than 1,300 publicly announced mergers and concluded that pretty much every industry moves through the same cycle of consolidation.
The first stage is when a few upstarts jump out to lead in a market that’s just developing, aggressively grabbing market share to make it tougher for others to jump in. Stage two is about getting bigger, buying competitors and complementary product lines.
That’s followed by a stage the authors called “focus,” a period of megadeals and large-scale consolidation. The goal here is to emerge out the back side as one of a handful of industry powerhouses. If new competitors spring up, either buy or simply crush them.
The last stage is the where the medical device industry is headed if it’s not already there, a stage of rough balance with just a handful of companies splitting up the market. That’s clearly where Abbott wants to be, joining the likes of Johnson & Johnson and Medtronic.
If it seems odd to think of one of our state’s great growth industries that way, as just another middle-aged industry that’s consolidating down to a handful of big players, remember that the period of hot growth never lasts long.
The merging out of existence of headquarters companies has even happened to the great technology cluster of Silicon Valley, which got its name from the material used to build semiconductors, the little black chips used in all sorts of electronic devices. It’s a business long past its peak growth years.
That’s why in 2015, the value of semiconductor company mergers roughly tripled from 2014, to more than $100 billion.
One deal was Intel’s purchase of chipmaker Altera, for pretty much the same reason Abbott wanted to buy St. Jude Medical. It seems Intel’s most demanding customers didn’t want to keep buying a chip from Intel and then another chip from Altera. They expected Intel to put the two together into one higher performing product.
The consolidation in chips, medical devices, coatings and all sorts of other industries helps explain what’s happened to the Wilshire 5000 index, meant to represent the value of all of the stocks traded in the United States. When it was invented in 1974 it had about 6,000 stocks. That’s dwindled, at last count, to about 3,600.
It’s not just companies on the bottom of the list being acquired, either. Last year 14 companies left the S&P 500 index because they had been merged out of existence, usually having been bought by another member of the S&P 500.
The first one struck from the list last year, in January, was based near Boston and had more than $10 billion in 2013 sales, a medical device maker called Covidien.
The buyer, of course, was Medtronic.