After months of speculation, Thermo Fisher (NYSE:TMO) has brought its rumored pursuit of diversified lab equipment and supply manufacturer Life Technologies (Nasdaq:LIFE) to a successful close. The two companies announced on Monday that they had reached an agreement whereby Thermo would acquire the company in an all-cash deal. While Life Tech's share price after the deal seems to show a little larger-than-normal discount, the bigger question may be whether Thermo anticipates another deal down the line.
The Terms Of The Deal
While analysts, writers, and financial media sources have been playing the M&A match game with Life Tech for a few months now, and have been speculating on a range of prices as well, the deal that was announced this morning was largely consistent with my expectations.
Thermo will pay Life Tech shareholders $76 million in cash for their shares, a nearly 12% premium to Friday's close and a roughly 40% premium to Life Tech's share price before the sale rumors really took off in earnest. With a total deal value of $15.8 billion ($13.6 billion in cash, plus $2.2 billion in assumed debt), Thermo is paying a little over 13 times trailing EBITDA. That puts the deal value in the lower end of the 12x to 17x range we've seen lately in life sciences, but it's consistent with the lower growth profile of Life Tech relative to many of the targets that comprised that valuation range.
Thermo expects to finance the deal with a combination of cash, debt, and equity, and anticipates less than $100 million in synergies in year one, but nearly $300 million by year three.
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What Thermo Is Getting
In buying Life Technologies, Thermo Fisher is getting a very large and diversified manufacturer of life sciences instruments and lab consumables. Life Tech's instrument sales make up roughly 15% to 20% of sales, and its position in markets like PCR, cell imaging, microscopy and so on should be a good complement to Thermo's mass spec and chromatography equipment offerings. On the other hand, Life Tech's strong consumables business will bump up the 55% or so of revenue that Thermo gets from consumables, and that should be positive for margins.
Life Tech will also alter Thermo's end-market exposures to some extent. At nearly 50%, Life Tech gets more of its revenue from government and academic customers than Thermo, and about 20% of Life Tech's business is tied to NIH grants. That's much less than companies like Illumina (Nasdaq:ILMN), but it's a risk factor all the same at a time when research budgets are under serious pressure.
On a longer-term basis, Life Tech could also enhance Thermo Fisher's cross-selling and clinical diagnostics efforts. I'm sure there will be sales force attrition as the two companies are integrated, but Thermo and Life Tech could both use this deal to sell instruments and equipment to non-traditional customers.
More significant, though, is the diagnostics opportunity. While Thermo's activities in diagnostics have been a little inconsistent (including selling Athena Diagnostics back in 2011), Life Tech has made several acquisitions over the past 18 months. What's more, Life Tech's strong position in sequencing should give it an important foothold in this emerging diagnostics opportunity (particularly companion diagnostics for pharmaceuticals).
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Is Thermo Going To Stand Pat?
While I mention that Life Tech's sequencing business could enhance Thermo's long-term diagnostics possibilities, it's also important to note that Thermo may not keep this business. Life Tech's Ion Torrent business has proven to be a disruptive force in sequencing, but the company has not exactly dislodged Illumina. What's more, while the business does generate a significant amount of Life Tech's sales growth, it doesn't generate a similar level of profits (breakeven is expected this year), and it does demand a high ongoing level of R&D.
It's probably an exaggeration to say that Thermo doesn't want a business with high R&D demands, but the combination of high R&D, fierce competition, and relatively quick obsolescence, may mean that the company is willing to consider selling it to another buyer. Roche (OTC:RHHBY) was rumored to also be interested in Life Tech, and it's prior interest in Illumina suggests that it could be a motivated buyer of the sequencing businesses. Frankly, that could be a win-win for Thermo – the deal for Life Tech seems accretive and logical as is, and there's no real pressure to sell, but if Roche is willing to pay an attractive multiple it's at least worth answering the phone.
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The Bottom Line
Win-win situations are rare in M&A, but this looks like one. I would argue that the somewhat drawn-out sales process argues that Life Tech got the best deal that was available, and given where the stock market is in terms of overall valuation, it's hard to argue that the board didn't get very good value for shareholders. That said, it will be interesting to see if the proxy materials for the merger provide more insight into the bidding process – particularly whether rumored parties like Sigma Aldrich (Nasdaq:SIAL), Danaher (NYSE:DHR), or General Electric (NYSE:GE) did show any serious interest, or whether I it largely just came down to Thermo and private equity groups.
As for Thermo, there's definitely some execution risk, but the management team here has generally been pretty good about improving margins and finding ways to improve operational efficiency. With Life Tech making Thermo arguably the preeminent player in life sciences and the deal appearing to produce at least high single-digit long-term returns, it looks like Thermo investors have reason to be happy as well.
At the time of writing, Stephen D. Simpson owned shares of Roche.