Conglomerates Seek Small Business Acquisitions
CINCINNATI - February 24, 2007 - When Dr. Edward Goldman heard the Procter & Gamble Co. had called, he immediately suspected it was a prank.
"We thought somebody was actually playing a joke," said Goldman, who couldn't guess what the giant consumer products company would want from his primary medical care business in Boca Raton, Fla. One of his colleagues had recently talked about P&G, praising the company as "the Harvard of marketing," so he figured someone was playing off that discussion.
It was no joke.
The phone call began a relationship that led to P&G's recently announced acquisition of a stake in MDVIP Inc., a company Goldman helped start six years ago in which physicians keep practices small and focus on preventive care for fee-paying patients. The deal, its terms undisclosed, is one in a series of little-noticed investments Procter & Gamble has made in the aftermath of its blockbuster $57 billion purchase of Gillette Co. in 2005, and the company says it's now focusing on smaller acquisitions.
While mergers such as P&G-Gillette or AT&T Inc.'s $86 billion buyout of BellSouth in December capture the headlines, large companies have also been busy with comparatively little deals. Companies such as P&G can expand business quickly that way by throwing their marketing muscle and infrastructure behind products that are already developed but in their early stages.
Coca-Cola Co. this month bought Fuze Beverage LLC for an undisclosed amount, extending the world's largest beverage maker's line of drinks with Fuze juice and tea brands. Johnson & Johnson Co. has also been active, obtaining cardiac stent maker Conor Medsystems Inc. and the consumer health products business of Pfizer Inc. in recent months.
"The rationale is from little seedlings grow big oak trees," A.G. Lafley, P&G's chief executive, told analysts last month, explaining that his company likes such deals "because it gives us time to learn; it gets us in early in the formation of the new category or segment."
Michael Docherty, chief executive of Venture2, which consults for and supports innovative entrepreneurs, said acquiring or partnering with smaller companies can be a quick way to add growth potential for big companies.
"They could have identified the same business opportunity and said let's do this ourselves," Docherty said. "It's this notion of open innovation."
"We've had a clarion call to find innovation wherever we can," said Nathan Estruth, general manager for P&G's new business division. "As part of that, we're always looking for companies that have interesting business models or brands."
In the case of MDVIP, P&G wanted to learn more about patients willing to pay up to $1,800 a year for personalized care that operates on a premise that close attention to wellness and prevention results in better health and lower medical costs in the long run.
MDVIP agreed about a year ago to give P&G access to the patients if P&G would share its research. From there, P&G decided to buy minority ownership of the privately held company.
Docherty said that with MDVIP, P&G is placing what is, for it, a small bet on a new consumer health model with big potential.
The investment in a doctors' network is a little out of the ordinary for the Cincinnati-based maker of products such as Crest toothpaste, Tide detergent and Pampers diapers. However, Estruth said it fits with P&G's "the consumer is boss" philosophy because it's about people making choices about their health care.
Other recent P&G health-related deals have included a licensing agreement with dental laser company Biolase Technology Inc. and paying $325 million in a venture with Inverness Medical Innovations Inc. to develop and market home diagnostic products.
"If you look at our current portfolio, the one area where we are continuing to experiment and where we are continuing to broaden and deepen and learn is health care," Lafley explained last month when P&G reported that its second-quarter profit jumped 12 percent and projected full-year sales growth of 10 to 12 percent, or up to $76.4 billion total.
"If you just look at the dynamics around the world, you will get demographics driving it, and you look at the cost of health care, it is going to be huge, and P&G has got to play in a bigger way there," he said.
General Electric Co., which recently bought part of Abbott Laboratories' diagnostics business for $8.13 billion, and Microsoft Corp. are among other giant companies that have been expanding their health care business with the help of acquisitions, joint ventures and other partnerships.
Steve Aylward, who heads Microsoft's health care and life sciences group, said the unit has swelled in five years from five people to 600. Microsoft sees strong growth for wireless and other software to help doctors, hospitals and others in the field speed up communications and improve information gathering and storage systems.
Docherty said many companies are looking at ways to get into health care because the aging baby boomer population, rising costs and increasing interest in new approaches add growth opportunities.
"The grass is always greener on the other side," he said.
For the small companies teaming with the big ones, there can be issues of adjusting to change.
"There's no getting around that P&G is going to apply their management disciplines and their approach to things," Docherty said. "There are some key personnel who may or may not get acclimated to the P&G culture."
But MDVIP's Goldman sees the P&G investment as a catalyst to keep building his business beyond the current 16 states, with some 50,000 patients.
"We think they are bringing a world of knowledge to us," he said. "They are masters of scaling and branding."
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