Issue Date: November 27, 2006
Thermo Fisher Scientific
Thermo Electron and Fisher Scientific were both strong companies that were doing fine on their own. They had aggressive strategies of making acquisitions to consolidate their portions of the laboratory and life sciences industry. They didn't need each other.
But their management teams saw an opportunity to make two strong companies even stronger, and on May 8, the companies announced their intention to join forces in a deal in which Thermo acquired Fisher for $10.6 billion in Thermo stock.
Both stocks had started that day at record highs, testimony to the well-being of both companies. Six months and one day later, the deal was final, creating Thermo Fisher Scientific. With more than $9 billion in revenues projected for next year, the new company is the largest player in the laboratory sector.
Quite remarkably, considering the size and scope of Thermo and Fisher, there was very little overlap in the companies' product lines. To win regulatory approval, they only needed to sell Fisher's Genevac evaporation equipment business, a $17 million product line.
Because both companies were in positions of strength, the time was right for such a move, according to Marijn E. Dekkers, president and chief executive officer of the new company. "You need two partners to tango, and it has to be right for both of them," he says. Dekkers had been president and CEO of Thermo since 2002 and is currently a member of C&EN's advisory board.
"We were very fortunate that both companies were doing very well at the time we started talking," he says. "What you often see in mergers is that one or both of the companies have run out of steam."
The relationship between Thermo and Fisher goes back several years, and many of Thermo's laboratory products are sold through Fisher's catalog. During the course of regular business meetings, the two companies realized that they had similar approaches to the marketplace, Dekkers says.
Both companies were striving to offer a broad portfolio of products and had been acquiring smaller companies to plug holes in their lineups. Thermo focused on laboratory hardware and software, whereas Fisher concentrated on consumables and biological reagents. Meanwhile, they both made acquisitions in the laboratory services area where they occasionally found themselves vying for the same targets.
Because both companies took the approach of consolidating the industry, convincing stockholders on both sides to approve the merger was a relatively easy task, Dekkers explains. Investors already understood the strategy.
Management could go to both sets of investors and say, "The strategy hasn't changed. We're just a lot better equipped to deliver on the relatively bold and unusual strategy for our particular industry," Dekkers says. "It was an extension of the story they had already heard, except with a combination of assets that is so much better positioned to really deliver."
Peter McDonald, an analyst at American Technology Research in Greenwich, Conn., is "cautiously optimistic" about the merger. "It makes sense on paper," he says. "It gives them quite a bit of leverage with customers and suppliers. It also offsets a little bit of Thermo's capital-intensive businesses with Fisher's consumables business. It's a nice dovetailing effect."
Management at the new company will be a combination of key leaders from Thermo and Fisher. Paul M. Meister, former vice chairman of Fisher, is now chairman of Thermo Fisher. Peter M. Wilver, the chief financial officer at Thermo, continues in that role in the new company.
"It's always a challenge" to integrate companies postmerger, McDonald says. "Fisher was a really well-managed company, so I don't think Thermo is going to find too many surprises. If anybody in this space can handle it, it's Thermo's management team."
Because of the companies' minimal overlap, most of the reshuffling will take place at the corporate level, as the new company trims down to a single headquarters in Waltham, Mass., the home base of Thermo.
Only slight changes will take place elsewhere. To make the transition as smooth as possible, Thermo and Fisher put together 63 transition teams in 10 areas to figure out how to fit the companies together. Everyday operations in the product lines will continue much as before the merger. "Really, the only time when there is going to be change is when both companies have businesses that are quite similar," Dekkers says. That degree of overlap exists mainly in diagnostics and laboratory equipment such as centrifuges, ovens, and safety cabinets.
Dekkers is banking on the name recognition of the two original companies. Thermo Fisher Scientific will be the parent company of two flagship brands with familiar names.
The first of those brands, Thermo Scientific, will encompass laboratory and instrument technologies and advanced reagents. Many of the biological reagent companies that were part of Fisher, including Dharmacon, HyClone, Cellomics, and Pierce, will be folded into the Thermo Scientific brand. Thermo Scientific is "about delivering an integrated solution to the lab," Dekkers says. "Most of our competitors have a hard time doing that because they don't have the breadth of portfolio of hardware, software, consumables, and reagents."
The second brand, Fisher Scientific, will continue to capitalize on Fisher's historic role as a distributor of laboratory products from a wide range of manufacturers.
With these two brands, Dekkers believes that Thermo Fisher can meet the needs of the entire laboratory marketplace. He divides the lab market into two types of customers: Scientists who are looking for innovation and performance, and laboratory managers and purchasing agents who are trying to maximize their budgets for routine purchases. "With Thermo Scientific, we focus on the scientist. With Fisher Scientific, we focus on that person who is trying to use his or her money as efficiently as possible," Dekkers says.
First, however, Thermo Fisher needs to rebrand the companies that Fisher had acquired but never rechristened.
Dekkers' management team has plenty of experience with rebranding. When Dekkers came aboard at Thermo, the company was fragmented into 24 smaller companies. Customers would do business with multiple Thermo companies without realizing that they were part of a larger organization.
Presenting Thermo in "such a fragmented way" just didn't "make any intrinsic sense" to Dekkers. Thermo went from 24 companies with 75 brands to a single company with a single brand.
If he were to undertake that rebranding again, Dekkers says, he would be even more aggressive and make the transition even more swiftly. "I would say, 'Boom, it's done. It's Thermo. Deal with it,' " he says. Instead, Thermo went through a three-year transition period in which it linked the old names with the Thermo name. "Maybe in the end, we still did the right thing, but it was extremely painful the first few years."
Dekkers and his team now have the opportunity to act on those lessons. "Fisher did quite a few acquisitions of quite good stand-alone companies that need to be integrated under one umbrella," he says.
Even as that rebranding is occurring, Thermo Fisher will continue moving forward to develop new products. Thermo had a history of emphasizing product innovation that will continue at the new company, according to Dekkers. In recent years, Thermo has invested as much as $170 million annually in R&D.
Thermo measured the efficiency of that R&D investment with its "vitality index," defined as the percentage of revenue derived from sales of products introduced in the past two years. Thermo's vitality index was 23% for 2005, and its target is 25% for 2006.
"It's not the kind of index that you want to get to 100%, because your customers want to have products that are out there in the marketplace," says Marc N. Casper, executive vice president of Thermo Fisher Scientific. "Continually improving this metric is a measure of the effectiveness of our R&D investments."
The vitality index will continue to be a key measure of Thermo Fisher's performance, particularly for the Thermo Scientific brand. "The vitality index is a reflection of how innovative we are in helping our customers do better work in the laboratory," Dekkers says. On the Fisher Scientific side, the more important measure of performance will be market share. "Are we growing? Do customers find it so easy to do business with us now that they will bundle their purchasing more and more" with Fisher?
Ian D. Jardine, vice president of global R&D at Thermo Fisher, is the person charged with making sure those R&D investments are effective. Over the past five years, the percent of sales that Thermo has invested in R&D has declined from nearly 8% to less than 6%. The new company does not yet know what its R&D expenditures will be.
The decline in the R&D-to-sales ratio has been by design, Jardine explains. The efficiency of the R&D operation has improved, and Jardine says he stopped a number of programs because they were wasting money. "We're focusing our resources on real opportunities and making sure those opportunities actually come to market," he says. "We want to spend the right amount on projects that are going to make a difference."
In addition to growth of existing product lines through research efforts, Dekkers says the strategy of growing by acquisition will continue.
He believes there's still plenty of room for consolidation in the analytical industry. "When you go to Pittcon, you see 1,200 different companies. That's a lot. It has to do with the fact that it's relatively easy to start a company in this industry," he says.
But the global nature of the industry makes it tough to survive as a small company. "It's one thing to sell to the local pharma and biotech community; it's something else to sell to Beijing and Mumbai," Dekkers says. Thermo Fisher already has the infrastructure in place in Asia, including a demonstration lab in China.
"People are going to say 'I have this great technology but it's so hard to market it globally. I'm better off putting it through the marketing channels of Thermo Fisher than if I try to do this on my own,' " Dekkers says. "I think a certain level of consolidation will continue."
With more than a billion dollars in cash flow each year, Thermo Fisher expects to have the financial wherewithal to make acquisitions. "We have the money, and the industry is still fragmented," Dekkers says. "I also believe, given our track record, that companies like to be acquired by Thermo or Fisher. Companies that are going to put themselves up for sale will look at Thermo Fisher as potentially a good home and a strong company to partner with."
Prioritizing areas for potential acquisitions will be more complicated in the new company. Dekkers believes that any gaping holes in either company's product line have already been filled. "That doesn't mean there aren't plenty of companies out there that I'm thinking would be a good match for us if the right opportunity came along," Dekkers says. "You have to be careful, because it's not just how good a company it is. The management is very important. You don't just buy the assets; you need the people as well."
Thermo and Fisher showed restraint in their own merger, and Dekkers thinks Wall Street recognizes and appreciates that. Thermo offered Fisher investors a premium of just 7% above the value of the stock at the time of the announcement. "There is not a big burden on the new management team to immediately deliver all kinds of dollars that were committed in a very high premium purchase price," he says.
But Dekkers isn't banking on Wall Street cutting his management team any slack. "The honeymoon period will only last as long as we deliver on our commitments," he says. "My experience with the stock market is that if you don't do that once, people completely forget there ever was a honeymoon. You're only as good as your last quarter."
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