Agilent, Varian mum on blockbuster deal

Proposed $1.5 billion merger would solidify Agilent's position in bio-analytical measurement

Amy Swinderman
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SANTA CLARA, Calif.—It's a deal that's being hailed by analysts and media organizations as a "transformational transaction" and "harmonic convergence" of "two Silicon Valley war horses" with "a lot of history to merge," but despite all of the industry buzz, both Agilent Technologies Inc. and Varian Inc. are tight-lipped about their recently announced agreement providing for Agilent's $1.5 billion acquisition of Varian.
Because the merger is subject to antitrust review by governmental authorities, both scientific instrument suppliers declined to comment on their agreement, under which Agilent will pay $52 cash per share of common stock for Varian, a 35 percent premium over Varian's July 24 closing price of $39.20.
The Silicon Valley leaders are also mum about a class action lawsuit filed in California state court by Varian shareholders challenging the acquisition.
What Agilent has said about the deal, via a formal statement released by the company on July 27, is that despite its leadership position in electronic measurement, its best opportunities for future growth are in bioanalytical measurement—and that for more than 60 years, Varian has built rich talent, technology, products and relationships in this area.
"This acquisition is a major step in Agilent's transformation into a leading bio-analytical measurement company," said Agilent president and CEO Bill Sullivan in a statement. "The combination of Varian with Agilent's bio-analytical measurement business will result in the broadest product offering in the industry. The acquisition will establish Agilent as a clear market leader in analytical solutions and give us the talent and technology base for creating unique new products and markets."
Likewise, Varian said in its own statement that aligning the two companies will position them as a clear market leader in analytical solutions.
"After thorough review together with our independent advisors, our board of directors determined that this transaction delivers excellent value for our shareholders," said Garry Rogerson, chairman and CEO of Varian. "We also anticipate that the combination will yield strong benefits for our customers and employees."
Both companies have long histories as technology leaders. A spin-off of Hewlett-Packard Co., Agilent raised $2.1 billion in 1999, breaking records as the largest initial public offering in Silicon Valley history. Varian was founded more than 60 years ago by brothers Sigurd and Russell Varian to develop electron tubes and other cutting-edge devices. The founders of both companies all were mentored by Fred Terman, the legendary Stanford University engineering dean considered the "father of Silicon Valley."
To date, Agilent has been more recognized in the communications and electronics sectors, while Varian's wheelhouse has been within the life science industry. But it's the future direction of both companies that make the acquisition a synergistic one, the companies said. In particular, it will broaden Agilent's offerings in the life sciences, environmental and energy industries and expand Agilent's product portfolio into atomic and molecular spectroscopy, establish a leading position in nuclear magnetic-resonance technology (NMR), imaging and vacuum technologies and strengthen its consumables portfolio, they said.
"We each bring expertise and experience across a different but complementary set of markets and applications," Rogerson stated. "For instance, while Agilent is a leader in food safety, Varian is well established in the energy industry, and has a broad spectrum of products for environmental analysis. Together, the combined company will be able to provide customers with the 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 assume responsibility for combining Varian with Agilent's Bio-Analytical Measurement segment consistent with Agilent's operating model.
"We have the opportunity to create significant value for Agilent shareholders by leveraging the combined entity's infrastructure and global 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 after releasing better-than-expected third quarter earnings results. Agilent's adjusted profit of 15 cents topped the 11 cents expected by analysts surveyed by Thomson Reuters, and the company upped its fourth quarter outlook to 20 to 25 cents per share, while analysts expected 20 cents.
Varian's shares surged following the announcement, climbing 29 percent to $50.53. That was still shy of Varian's $52 price tag. Its 52-week trading range was $19.83 to $51.98. Varian generated $1.01 billion in its fiscal 2008 sales, and analysts expect more than $850 million in sales this year. Without consideration of this merger, analysts were 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, the companies said.
The transaction is expected to generate $75 million in annual cost synergies and achieve Agilent's 20 percent 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. The transaction is not subject to any financing conditions. Agilent hopes to seal the deal before year's end.
The deal is already facing one potential obstacle, in the form of a lawsuit filed in Santa Clara County Superior Court Aug. 13 by Kendall Law Group on behalf of Varian shareholders challenging the proposed acquisition.
"Given that Varian shares traded close to $70 per share in 2008, this transaction appears to be unfair. Also, the Varian board agreed to a no-solicitation provision and a $46 million termination fee that will ensure that no superior offer will be forthcoming," Kendall Law Group said in a statement.
The companies have declined to comment on the deal or the lawsuit, and the latter event aside, analysts have looked favorably upon the deal.
Richard Eastman, a senior analyst with Robert W. Baird, told the Wall Street Journal's MarketWatch that the deal will help Agilent "fill in some holes" in its business, such as in NMR, which would have taken the company several more years to build up. Baird holds an "outperform" rating on Agilent's stock.
"It's a nice opportunity for Agilent to improve some product lines where it could have fallen behind," Eastman added. "It seems to be a very practical move for them."
Bank of America/Merrill Lynch analyst Jon Wood wrote in a research note that the acquisition is also strategically important for Agilent to 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 away from highly volatile electronic-measurement markets into more stable life-science markets that offer more compelling returns on capital," Wood wrote.

Amy Swinderman

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