SAN FRANCISCO/CHICAGO Agilent Technologies Inc (A.N) said it will buy Varian Inc VARI.O for $1.5 billion in cash to bolster its fast-growing bioanalytical measurement business.
Agilent, which makes electronic testing equipment, said it will pay $52 a share, which is a 35 percent premium to Varian's closing share price on Friday. The boards of both sides have approved the deal, the companies said on Monday.
The shares of Varian rose 29 percent to close at $50.61 on the Nasdaq. Varian specializes in instruments to measure biological and physical properties.
The shares of Sequenom Inc (SQNM.O), which makes genetic analysis products, rose nearly 14 percent on speculation it might also become a takeover target.
Agilent shares rose 1.75 percent to close at $22.66 on the New York Stock Exchange, reflecting the view of analysts that the price was fair and that the takeover would help earnings.
Analysts said Agilent has long wanted to expand its bioanalytical measurement business, which accounted for about 46 percent of revenue in the second quarter. The segment has a higher profit margin and is a more stable business than the increasingly commoditized electronic measurement business that now accounts for more than half of Agilent's revenue.
The acquisition of Varian will bump bioanalytical measurement to about 55 percent of Agilent's revenue and there was room for cost cuts to boost profit growth. These two factors justify the price, analysts said.
"The premium may appear big on the surface, but when you do the math, the price being paid by Agilent for Varian really brings Varian's valuation in line with the peer group," said Robert W. Baird & Co analyst Richard Eastman. "I would put the price paid in the fair category."
Eastman estimated Varian would add 5 cents to 10 cents per share to Agilent's adjusted earnings in the first full year.
Agilent posted earnings of $1.87 per share in 2008 after adjusting for special items and is forecast to post a 16 cent loss in 2009, according to Reuters Estimates.
The company expects regulators to approve the deal before the end of the year. Once completed, the transaction will likely result in $75 million in annual savings, it said.
COST CUTTING OPPORTUNITIES
Agilent competes with PerkinElmer Inc (PKI.N), Thermo Fisher Scientific Inc (TMO.N), Waters Corp (WAT.N), and Life Technologies Corp (LIFE.O) in the bioanalytical business.
It said Varian can help Agilent expand product offerings in the life sciences, environmental, energy and materials sectors, and help it enter new markets, including nuclear magnetic resonance imaging and atomic and molecular spectroscopy.
"While we continue to be a world leader in electronic measurement, our biggest opportunities for future growth are in bioanalytical measurement," Agilent Chief Executive Bill Sullivan said in a statement.
Credit Suisse North America analyst William Stein said some investors may have been worried Agilent's earnings were driven by its bioanalytical measurement business, while revenue depended on the struggling electronic measurement business.
"This deal pushes (Agilent) more in the direction of permanently having both revenue and earnings higher from the bioanalytics side," Stein added.
Varian, which had revenue of $1 billion in fiscal 2008, reported fiscal third-quarter earnings on Monday that beat Wall Street expectations, helped by a lower tax rate.
Isaac Ro, an analyst with Leerink Swann, said Agilent is well known for using its scale to lower costs.
"We view this ($52-a-share) valuation as reasonable given the ample cost-cutting opportunities available to (Agilent) post-deal," Ro wrote in a note to clients.
(Reporting by Paul Thomasch in New York, Susan Kelly in Chicago, Clare Baldwin in San Francisco and Shailesh Kuber in Bangalore; editing by Tiffany Wu and Andre Grenon)