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The recently announced
mega-merger between Thermo Electron and Fisher
Scientific International will likely send ripples
throughout the tool sector of the life, laboratory,
and health sciences industries.
The size of the deal
alone is eye-popping. The new company, Thermo Fisher
Scientific Inc., has projected 2007 revenues of more
than $9 billion and $1 billion in cash flow. It will
comprise about 30,000 employees, including a sales
force of 7,500. But it’s how the pieces fit together
that make this deal even more interesting. Most
suppliers in the life science instrument and
consumables industry have traditionally been
fragmented, with many specializing in one or two
different products. This deal takes a big step in the
opposite direction.
“Now for the first
time, we have all instruments and consumables in one
spot, and it happens to be the two largest players
from each sector coming together. That’s certainly
going to be a different dynamic than what the life
sciences space has seen before,” says Quintin Lai, a
senior research analyst at Robert W. Baird & Co.
“I’ve been talking
for a long time about the need for this industry to
consolidate, and this is the first large-scale
transaction that we’ve seen,” says Ross Muken, an
analyst at Deutsche Bank. He says this creates a
“one-stop shop for scientific supplies,” and that
lets pharmaceutical companies become more efficient in
their purchasing and R&D efforts.
Arranged as a stock
swap, Fisher shareholders will receive two shares of
Thermo common stock for each share of Fisher stock,
resulting in Fisher shareholders owning about 61
percent of the new company. Marijn E. Dekkers, current
president and CEO of Thermo, will become president and
CEO of the combined company, and Paul Meister,
Fisher’s current vice chairman of the board, will
become new chairman of the board. The merger is
expected to result in a 20 percent compound annual
growth rate in adjusted EPS over three years. The
transaction, yet to be approved by both companies’
shareholders and regulatory agencies, is expected to
close in the fourth quarter of this year.
Fisher spokesperson,
Gia L. Oei, says customers expressed interest and have
increased demand for obtaining supplies from one
company, and “with this combination, we’re in a
terrific position to do that.”
However, Lai argues
that R&D customers in the tool sector want to be
on the leading edge of technology and a company
doesn’t necessarily have to be bigger to sell more
of these types of products. “As long as you are on
the leading edge, and you have products that are
meaningful to helping researchers to push the
envelope, they’ll find you,” he says. The big
advantage of the Fisher/Thermo deal is in the capital
they have available now. “This new company has all
this cash flow generation opportunity, they can
acquire companies that are on the leading edge and
help push their portfolio in that direction,” Lai
says.
For the commodities
side of the company, he adds, researchers may be
indifferent as to where they buy their supplies, and
there, the one-stop shopping makes everything more
convenient. “It’s like the supermarket analogy —
the bigger the supermarket, the more convenient it is
for people to shop.”
The combined company
will continue its emphasis on the Asian markets, with
a sales force of more than 800 there and new
facilities in Shanghai and Mumbai. Muken emphasizes
it’s key to have a large Asian presence from a
manufacturing perspective. “If you look at new lab
growth worldwide, the growth in India and China dwarfs
the rest of the world.” Lai agrees: “The Asian
markets are a key cross-strategy for everyone in the
tool space.”
Click to enlarge
Should Smaller
Companies Worry?
Companies that compete
head-to-head with this new entity have the most reason
for concern, as well as companies that lack
intellectual property or product differentiation.
“Any company that brings new technology to market
— there’s always need for that,” says Muken. And
it remains to be seen whether large pharmaceutical
companies will actually opt to purchase their tools in
a “one-stop-shopping format.”
Kevin Hrusovsky,
president and CEO of Caliper Life Sciences, says this
merger will provide “the assets to do something
pretty formidable that could cause everyone in the
industry to pause and try and figure out how to
participate around Thermo/Fisher because of the
strength they may have in their sectors.” He says
his company has established strong networking ties
with universities to bring innovative technology into
commercialization. As a result, “we’re not overly
concerned that the merger is going to cause us to
shift dramatically,” Hrusovsky says.
In addition to having
strong patents on leading-edge technologies, Hrusovsky
says, Caliper also has good customer relations.
“We’re still small enough to truly listen to
customers and react to their input, which is where
we’re going to continue to carve out a niche market.
The bigger other companies become — maybe that could
actually work to our advantage.”
Oei says there has been
a move toward consolidation in this industry over the
past five years, and Fisher has recently acquired a
number of companies, increasing its portfolio in the
life sciences sector. However, she says that although
these two large companies are merging, there are still
many opportunities for consolidation. However, she
adds, “I don’t think this particular transaction
is going to spur more acquisitions than would have
occurred if these two partners didn’t come
together.” She adds that many companies with niche
products will continue to serve customers.
According to Hrusovsky,
there hasn’t recently been sufficient growth in the
tool sector to warrant the “go it alone” strategy.
“A lot of what’s happening is growth through
consolidation versus organic
growth,” he says. “Wall Street is putting pressure
on everyone to grow, so I think it causes companies to
consolidate as a way to keep their revenue going.”
Caliper, he says, has
been acquiring companies with strong organic growth.
So they aren’t relying on acquisition growth to
fulfill investor expectations. “Our strategy is to
go after high-performing, transformative technologies,
develop relationships with customers where we can
introduce those technologies, and show them how to use
them. This allows us to grow those technologies
organically.”
Muken describes the
Thermo/Fisher merger as the “first of what will be a
series of movement in the space. I think we see a
series of players coming together, and then we’ll
see larger conglomerates like GE and Siemens becoming
more aggressive.” Oei explains that this merger is
“industry transforming” because “what we will do
is create the world’s only provider of fully
integrated end-to-end solutions in the life sciences,
laboratory, and health sciences industry.”
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