Dive Brief:

• Baxter is in advanced talks to buy Hillrom in a deal valued at around $10 billion, reported The Wall Street Journal on Sunday, citing people familiar with the matter. Hillrom's stock was up more than 10% in Monday trading on the news.
• Late last month, The Wall Street Journal and Bloomberg reported Baxter was in early discussions to acquire the medical-equipment maker. Hillrom reportedly rejected that offer of $144 per share. The latest report, which values Hillrom at around $150 a share, could be reached by midweek "assuming the talks don’t fall apart," according to WSJ's unnamed sources.  
• Wall Street analysts have been skeptical of a potential union. Baird wrote Monday they talked themselves into a combination given Hillrom's push into connected care, the focus of Baxter's M&A strategy. However, J.P. Morgan argued Baxter has a "tall order" convincing investors "this is a more strategic vs. financial acquisition."

Dive Insight:

Baxter CEO Joe Almeida in late July laid out his thinking on M&A emphasizing that the company is "doing a lot in connected health" and looking to "make sure that we have the ability to deploy capital in that area." At the time, a Baird analyst said Almeida's remarks sounded like a "non-specific defense" of a Hillrom deal.

While Baxter's earlier $144 per share offer was reportedly rebuffed by Hillrom, the latest reported bid of around $150 a share might have what it takes to seal the deal. 

Baxter has been looking for a meaningful M&A target since Almeida took the helm in January 2016. The CEO told investors in late July that the size of deals is a "secondary" consideration to "strategic fit" for Baxter. 

However, J.P. Morgan wrote Monday that Baxter's management "will have a tall order to convince investors" this is more of a strategic acquisition versus a financial buy.

"While Hillrom is improving its product portfolio, adding value with connected care, and continuing to expand internationally, we see some, but not an overwhelming strategic benefit," wrote the J.P. Morgan analysts, who noted that "integrating the connected care aspect with Hillrom’s beds and monitors might have synergies" with Baxter's infusion pump business. 

But Baird's Polark argued skeptics under-appreciate the "momentum Hillrom is building in care communications, middle ware, smart beds, digital exam tools, intelligent non-contact monitoring devices, and OR automation solutions." Polark added that the acute care environment is "in the early innings of another wave of digital transformation" and the products adopted so far by hospitals are generally suboptimal.  

While Polark acknowledged the Hillrom portfolio "isn’t a silver bullet to fix all that ails," the analyst contends that the company's products bring "a lot of tools to bear and seems, in some respects, to just be getting started on its digital journey." Polark asked: "As a major partner to health systems, why wouldn't Baxter want to be involved here?”

Nonetheless, J.P. Morgan analysts observed that while there are synergies between the two companies there is not an overwhelming strategic benefit. Among the analyst's objections to a potential deal is Hillrom's 2-3% weighted average market growth rate.

"Nothing against Hillrom, which has done an excellent job improving its business over the years, but the company’s WAMGR is in the 2-3% range now, below Baxter’s at ~3-4%, and uninteresting as far as MedTech end-market growth goes," the J.P. Morgan analysts wrote. "Without accelerating top-line growth, we don’t think investors would like Baxter entering lower growth end-markets for the benefit of accretion."