Kimberly-Clark Buys Ballard--The Device Industry's No Man's Land

While Kimberly-Clark's acquisition of Ballard Medical Products doesn't have the seismic impact of Medtronic's acquisition of Arterial Vascular Engineering, it's still a big deal--nearly three-quarters of a billion dollars in size. More importantly, it represents the kind of deal-making that is relevant to most hospital supply and device companies.

After a simply amazing year that saw one blockbuster deal after another, the medical device industry took a breather this month. Kimberly-Clark Corp. 's acquisition of Ballard Medical Products Inc. [See Deal]. Still, it’s a big deal--nearly three-quarters of a billion dollars in size. More importantly, it represents the kind of deal-making that, though very different from the headline-grabbing, blockbuster acquisitions of the past year, is arguably more relevant to most hospital supply and device companies.

For years, Ballard Medical Products, a manufacturer of innovative devices used in respiratory and gastrointestinal medicine, finished high on the list of top-performing public companies compiled by general business magazines. And for nearly as long, the company was not-so-secretly for sale but couldn't find any takers. The problem: owning individual product niches—and performing well in them—isn't enough in a hospital supply business that demands critical mass.

Ballard itself had 1998 sales of around $150 million—a level that has become a kind of no-man's land for device companies. Below a certain size—say, $75 million—growth is sustainable because a company can still penetrate its niche. Above another level—perhaps $500 million—companies grow by expanding into other product areas or platforms. But companies in the middle find it hard to go either way: they've long ago tapped out the niche they've historically inhabited but often don't have the resources to expand aggressively outside that niche. Those companies face a fatalistic dilemma: no matter how successful they've been in their core business, a sale becomes almost inevitable because they're no longer at a sustainable size.

Larger companies like Kimberly-Clark face the same dilemma from the opposite angle: they either grow by acquisition or get out of the business. This is, in fact, K-C's second such acquisition this year; in September 1997, it acquired Tecnol Medical Products Inc. , a leading manufacturer of surgical face masks and other disposable medical supplies [See Deal].

For large suppliers in cardiovascular devices and orthopedics, success over the past several years has created a growth problem: how do you continue to deliver on investors' expectations when you constantly raise the bar? Hence the big deals in recent years by companies such as Boston Scientific Corp. , Johnson & Johnson, and this year's big deal-maker, Medtronic.

But this kind of growth problem is almost exclusively framed for product companies in these two segments—not coincidentally, they're also the two segments in which most of the large deals of the past year took place. Indeed, cardiovascular and orthopedics are rare in medical supplies and devices for their intrinsic growth capability; most other product segments historically grow at much slower rates. Ironically, for companies in these slower-growing product areas, driving growth isn't the problem—or rather, the issue isn't as much one of sustaining impressive growth rates, but rather of achieving the necessary critical mass to prove yourself large enough a supplier to ever-larger customers so that you don't get lost in the shuffle.