Agilent-Varian, Partly Transformational Move (A, VARI)

Agilent Technologies Inc. (NYSE: A) is making what seem an unusual acquisition.  It is acquiring Varian, Inc. (NASDAQ: VARI) after signing a definitive agreement for the acquisition.  Agilent will pay roughly a 35% premium of $52.00 per share in cash for Varian’s outstanding stock, which comes to a price tag of roughly $1.5 billion. Both Agilent’s and Varian’s Board of Directors have unanimously approved the acquisition.

This may seem a strange acquisition on the surface when you consider Agilent’s history.  Agilent provides bio-analytical and electronic measurement solutions to the communications, electronics, life sciences, and chemical analysis industries.  But in its history most have thought of it in the communications and electronics sectors.  Varian is supplier of scientific instrumentation and associated consumables for life science and applied market applications. This acquisition will broaden Agilent’s offerings in life sciences, environmental, and energy and materials. Specifically, this merger will expand Agilent’s product portfolio into atomic and molecular spectroscopy, establishes a leading position in NMR, imaging and vacuum technologies, and strengthens its consumables portfolio.

But this is also, according to CEO Bill Sullivan, “…a major step in Agilent’s transformation into a leading bio-analytical measurement company… While we continue to be a world leader in electronic measurement, our biggest opportunities for future growth are in bio-analytical measurement.” The company also believes this merger will make Agilent into a market leader in analytical solutions.  The transaction is expected to generate $75 million in annual cost synergies and achieve Agilent’s 20% return on invested capital target within four to five years.

The transaction is subject to approval by the shareholders of Varian and will be completed after achieving customary closing conditions and regulatory approvals, which Agilent expects before calendar year-end. The transaction is not subject to any financing conditions.

It is not hard to see how Agilent and Varian came up with a price that is certain to receive shareholder approval.  Varian’s $52.00 price tag compares to a $39.20 close, and its 52-week trading range was $19.83 to $51.98.

Varian generated $1.01 billion in its fiscal 2008 sales and we have analysts looking for more than $850 million in sales this year.  Without the consideration of this merger, we have analysts looking for $4.36 billion in sales this year. Agilent had 2008 sales of $5.774 billion.  So while the revenue diversification is coming, this will add less than one-fifth in new revenues on a trailing basis and on an expected basis.

Agilent shares are down nearly 3% at $21.64 in early trading on the announcement.  Its 52-week range is $12.02 to $37.25 and its market cap as of Friday’s close was $7.65 billion.  Varian shares are up 29% at $50.70.

Jon C. Ogg
July 27, 2009