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Abbott Laboratories (ABT) has agreed to acquire Advanced Medical Optics Inc. (EYE) for $1.36 billion in a deal that launches Abbott into the eye-health market at a discount but also exposes it to a business that has slumped during the recession.

Abbott will pay $22 a share for Advanced Medical in a tender offer, a huge premium to Friday's closing price of $8.85 but also a level where the stock was trading just four months ago. Abbott executives defended the valuation: They see the deal, valued at $2.8 billion including the assumption of debt, neutral to per-share earnings this year and positive next year.

Shares of Advanced Medical had crumbled nearly 90% in September and October as the market for laser-vision correction - for which the company is the top equipment maker - was severely damaged by economic pressure. Advanced Medical, which has been restructuring to lower costs, also is still recovering from a contact-lens-solution recall in 2007.

But the company also has a big business for treating cataracts, which is an age-related issue and a market fueled by demographics. Overall, Abbott sees Advanced Medical's sales steadily growing in a high-single-digits range.

The deal's value "is a fair price for what the acquisition brings to us," said John M. Capek, executive vice president of medical devices at Abbott, in an interview.

Shares of Advanced Medical skyrocketed to near the purchase price Monday and recently more than doubled to $21.61. The company's shares were also on the rise leading up to the deal's announcement - through Friday, they had risen nearly 34% year to date. An Advanced Medical spokeswoman declined to comment on the stock movement ahead of the deal.

Shares of Abbott slipped on Monday and were recently down 48 cents to $50.69.

Some analysts were concerned Abbott may have paid too much for Advanced Medical. The skepticism was fueled further when Abbott executives said on a conference call that they had no competition in negotiations to buy Advanced Medical. JPMorgan analyst Michael Weinstein told Abbott executives on the call that there may be "raised eyebrows" among Abbott shareholders who view Advanced Medical as a "distressed asset."

"Given the lack of a competitive bidding process, the stock's previous close, and the multiple hurdles ahead of it, the deal price seems high to us," BMO Capital Markets analyst Joanne K. Wuensch, who rates Advanced Medical shares market perform, wrote in a note to clients.

Wuensch said the deal places an enterprise value on Advanced Medical that is 2.4 times trailing 12-month revenue, versus a 1.7 ratio for the private-equity takeover of Bausch & Lomb in 2007 (a deal, incidentally, that Advanced Medical pursued before bowing out).

But Abbott executives defended the valuation, which at about 2.5 times Advanced Medical's annual sales they said was in line with similar deals in the past. Abbott Chief Financial Officer Thomas Freyman said the company was confident it could generate solid returns from the deal, especially if the laser-surgery market rebounds with an economic recovery.

"Wedo think that the economic situation has been more than factored into the current price of [Advanced Medical's] stock, and clearly there is an opportunity here in the market recovery to essentially have a call option on the economy," Freyman said.

Peter Goldman, a principal with Front Barnett Associates in Chicago who owned Abbott shares at a previous firm, supports the deal. "I think these are the times, when the market is down, when you want to buy these things," he said.

JPMorgan's Weinstein said that despite the high premium, "We understand Abbott's rationale for the transaction." Still, it might take longer for Abbott to generate solid returns on the deal than in prior deals, he said in a note to clients.

Abbott noted that 60% of people over 60 have cataracts and that the number of people with the eye problem is expected to grow nearly 50% in the next decade. The cataract business accounts for half of the revenue at Advanced Medical Optics, and 70% of its cataract sales are overseas.

Advanced Medical, Santa Ana, Calif., has the No. 2 position in the cataract market, along with the No. 3 position in contact-lens care, Abbott said.

Abbott Chairman and Chief Executive Miles D. White said in a statement that his company's global heft "will help drive growth opportunities for this business, especially in international markets, where favorable demographics are driving demand for advanced eye care procedures and products."

 
   Lasik Downturn 
 

Analysts asked Abbott executives Monday about its outlook for the laser-vision, or Lasik, market, in which lasers are used to correct vision. The procedures are expensive and paid out of pocket, making the Lasik market very vulnerable to economic slump.

But Abbott sees an opportunity for improvement due to Advanced Medical's leading position for Lasik equipment, which includes an increasingly used device that uses lasers rather than a blade to cut a flap in the cornea for surgery.

"Given their broad base of equipment, they do stand to rebound considerably," Abbott's Capek said.

Advanced Medical has had problems outside the Lasik market, however, especially in the market for multipurpose contact lens solutions used to clean and store lenses. The company pulled its major solution from the market in mid-2007 after health authorities found a link between the solution and a rare but dangerous infection called Acanthamoeba keratitis.

The company quickly re-entered the market with an older product and has yet to regain the market share it lost to competitors including Alcon Inc. (ACL). One question has been when it will roll out a next-generation solution.

Capek said Abbott does have some visibility on that matter but didn't offer specifics, although Abbott does see potential for accelerating Advanced Medical's research and development pipeline. "As part of our due diligence, we went through a full portfolio review," Capek said.

The lens-solution recall came right after Advanced Medical made a play to purchase Bausch & Lomb. The financial hit and stock drop triggered by the recall made a Bausch deal much tougher to swing, however.

Such an acquisition would have given Advanced Medical access to two big eye-product categories it does not yet have: drugs for eye problems and contact lenses. Adding Abbott's heft and resources, and its background as a major drug maker, is likely to raise anew questions about expanding the portfolio.

The major contact-lens makers include Bausch & Lomb, J&J's Vision Care business, Novartis AG's (NVS) Ciba Vision and Cooper Cos. (COO). Cooper shares recently traded up 8.2% to $20.45.

Major eye-drug makers include Alcon, Bausch & Lomb and Allergan Inc. (AGN).

Abbott executives said Monday that they believe Advanced Medical stands on its own. "We really don't need to do more to be successful," Freyman said.

"As always, we'll continue to look for opportunities to further supplement that business," Capek said in the interview. "But the acquisition is stand-alone."

Abbott on Monday also reiterated its 2008 earnings target while projecting 2009 earnings, excluding items, of $3.65 to $3.70 a share. The earnings outlook fell within analysts' expectations.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

(Mike Barris and Pete Loftus contributed to this report.)

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