SANTA CLARA, Calif.—It's a deal that's being hailed byanalysts and media organizations as a "transformational transaction" and"harmonic convergence" of "two Silicon Valley war horses" with "a lot ofhistory to merge," but despite all of the industry buzz, both AgilentTechnologies Inc. and Varian Inc. are tight-lipped about their recentlyannounced agreement providing for Agilent's $1.5 billion acquisition of Varian.
Because the merger is subject to antitrust review bygovernmental authorities, both scientific instrument suppliers declined tocomment on their agreement, under which Agilent will pay $52 cash per share ofcommon stock for Varian, a 35 percent premium over Varian's July 24 closingprice of $39.20.
The Silicon Valley leaders are also mum about a class actionlawsuit filed in California state court by Varian shareholders challenging theacquisition.
What Agilent has said about the deal, via a formal statementreleased by the company on July 27, is that despite its leadership position inelectronic measurement, its best opportunities for future growth are inbioanalytical measurement—and that for more than 60 years, Varian has builtrich talent, technology, products and relationships in this area.
"This acquisition is a major step in Agilent'stransformation into a leading bio-analytical measurement company," said Agilentpresident and CEO Bill Sullivan in a statement. "The combination of Varian withAgilent's bio-analytical measurement business will result in the broadestproduct offering in the industry. The acquisition will establish Agilent as aclear market leader in analytical solutions and give us the talent andtechnology base for creating unique new products and markets."
Likewise, Varian said in its own statement that aligning thetwo companies will position them as a clear market leader in analyticalsolutions.
"After thorough review together with our independentadvisors, our board of directors determined that this transaction deliversexcellent value for our shareholders," said Garry Rogerson, chairman and CEO ofVarian. "We also anticipate that the combination will yield strong benefits forour customers and employees."
Both companies have long histories as technology leaders. Aspin-off of Hewlett-Packard Co., Agilent raised $2.1 billion in 1999, breakingrecords as the largest initial public offering in Silicon Valley history.Varian was founded more than 60 years ago by brothers Sigurd and Russell Varianto develop electron tubes and other cutting-edge devices. The founders of bothcompanies all were mentored by Fred Terman, the legendary Stanford Universityengineering dean considered the "father of Silicon Valley."
To date, Agilent has been more recognized in thecommunications and electronics sectors, while Varian's wheelhouse has beenwithin the life science industry. But it's the future direction of bothcompanies that make the acquisition a synergistic one, the companies said. Inparticular, it will broaden Agilent's offerings in the life sciences,environmental and energy industries and expand Agilent's product portfolio intoatomic and molecular spectroscopy, establish a leading position in nuclearmagnetic-resonance technology (NMR), imaging and vacuum technologies andstrengthen its consumables portfolio, they said.
"We each bring expertise and experience across a differentbut complementary set of markets and applications," Rogerson stated. "Forinstance, while Agilent is a leader in food safety, Varian is well establishedin the energy industry, and has a broad spectrum of products for environmentalanalysis. Together, the combined company will be able to provide customers withthe most comprehensive set of solutions across a wider range of industries."
Once the acquisition has been completed, Adrian Dillon,Agilent's executive vice president and chief financial officer, will assumeresponsibility for combining Varian with Agilent's Bio-Analytical Measurementsegment consistent with Agilent's operating model.
"We have the opportunity to create significant value forAgilent shareholders by leveraging the combined entity's infrastructure andglobal supply chain," said Dillon.
Following the news, Agilent shares fell nearly 3 percent to$21.64 in early trading, but rebounded two weeks later to $25.36 afterreleasing better-than-expected third quarter earnings results. Agilent'sadjusted profit of 15 cents topped the 11 cents expected by analysts surveyedby Thomson Reuters, and the company upped its fourth quarter outlook to 20 to25 cents per share, while analysts expected 20 cents.
Varian's shares surged following the announcement, climbing29 percent to $50.53. That was still shy of Varian's $52 price tag. Its 52-weektrading range was $19.83 to $51.98.
Varian generated $1.01 billion in its fiscal 2008 sales, andanalysts expect more than $850 million in sales this year. Withoutconsideration of this merger, analysts were looking for $4.36 billion in salesthis year.
Agilent had 2008 sales of $5.774 billion. So while the revenuediversification is coming, this will add less than one-fifth in new revenues ona trailing basis and on an expected basis, the companies said.
The transaction is expected to generate $75 million inannual cost synergies and achieve Agilent's 20 percent return on investedcapital target within four to five years. The transaction is subject toapproval by the shareholders of Varian and will be completed after achieving customaryclosing conditions and regulatory approvals. The transaction is not subject toany financing conditions. Agilent hopes to seal the deal before year's end.
The deal is already facing one potential obstacle, in theform of a lawsuit filed in Santa Clara County Superior Court Aug. 13 by KendallLaw Group on behalf of Varian shareholders challenging the proposedacquisition.
"Given that Varian shares traded close to $70.00 per sharein 2008, this transaction appears to be unfair. Also, the Varian board agreedto a no-solicitation provision and a $46 million termination fee that willensure that no superior offer will be forthcoming," Kendall Law Group said in astatement.
The companies have declined to comment on the deal or thelawsuit, and the latter event aside, analysts have looked favorably upon thedeal.
Richard Eastman, a senior analyst with Robert W. Baird, toldthe Wall Street Journal's MarketWatch that the deal will help Agilent "fill insome holes" in its business, such as in NMR, which would have taken thecompany several more years to build up. Baird holds an "outperform" rating onAgilent's stock.
"It's a nice opportunity for Agilent to improve some productlines where it could have fallen behind," Eastman added. "It seems to be a verypractical move for them."
Bank of America/Merrill Lynch analyst Jon Wood wrote in aresearch note that the acquisition is also strategically important for Agilentto get into what are proving to be lucrative business areas. Wood has a "buy"rating on Agilent's stock.
"The transaction would accelerate Agilent's transition awayfrom highly volatile electronic-measurement markets into more stablelife-science markets that offer more compelling returns on capital," Woodwrote.
