Scientific instrument maker Agilent finally completed the $1.5 billion acquisition of competitor Varian in May. This pivotal deal, intended to bolster Agilent’s life sciences and chemical analysis businesses, took a full 10 months to complete. William P. (Bill) Sullivan, Agilent’s chief executive officer, is glad the deal is finally done. And he says other deals, both large and small, could come in the future.
But for now, Sullivan says, “we are focusing on getting Varian integrated as fast as we can.” What will result, he hopes, is a rebalanced scientific instrument company more broadly involved in opportunities outside its traditional electronics measurement business.
Large acquisitions are not without risk, because of both potential regulatory delays and the time and attention needed to successfully integrate them. What took Agilent especially long with the purchase of Varian were Federal Trade Commission and European Commission requirements that it divest overlapping product lines.
To make the deal happen, Agilent arranged the sale of four businesses with a total of less than $100 million in sales. However, doing that during an economic slowdown took time. In January, Agilent sold its micro gas chromatography business to Switzerland’s Inficon. In March, Varian sold its inductively coupled plasma mass spectrometry (MS), laboratory gas chromatography (GC), and GC triple-quadrupole MS businesses to Bruker.
Sullivan, 60, who has a B.S. from the University of California, Davis, and has led Agilent since 2005, breathed a sigh of relief when those deals were done, but he sees a silver lining in the delay. “It allowed us a lot more time to plan for the integration and to get to know the Varian people. As a result, we are hitting the ground running,” he says.
Sullivan, who has been with the firm and its predecessor, the computer maker Hewlett-Packard, for 34 years, says 80% of the sales integration is complete. The two firms also used the waiting period to finish a review of their combined portfolios and design a plan “on how we share technology,” he adds.
Still under way is the work to integrate ordering and software systems to meld the two organizations into one. “Our top priority is to make sure we don’t lose any business and also to make sure we can grow our business with the combination of the two teams,” Sullivan says.
Headquarters: Santa Clara, Calif.
Sales: $5.3 billion
Operating income: $43 million
R&D spending: $699 million
Capital spending: $153 million
BUSINESSES (% of total sales):
Electronics measurement (45%): oscilloscopes, network and logic analyzers, electronics industry software and test services
Chemical analysis (28%): liquid chromatography, gas chromatography, and mass spectrometry systems; consumables; software
Life sciences (27%): DNA microarray, chromatography, nuclear magnetic resonance, and X-ray equipment; bioreagents; informatics software; robotics
NOTE: Figures for 2009 are pro forma and include Varian, acquired in May 2010.
Agilent has made its share of acquisitions in the 11 years since it spun out of Hewlett-Packard, helping it become the world’s third-largest instrument company, according to a C&EN survey (C&EN, April 26, page 22). Sullivan counts 21 buys, not including Varian. The largest, in 2007, was the $250 million purchase of Stratagene, a maker of life sciences reagents and instruments. The others, all much smaller, included Velocity 11, a life sciences laboratory robotics firm, and MTS Systems’ nanoinstruments business unit, a maker of instruments and software to characterize nanomaterials.
But the size and complexity of incorporating Varian into Agilent make this combination stand out. Varian had 3,000 employees and $800 million in sales in 2009, compared with Agilent’s 16,000 employees and $4.5 billion in sales.
The purchase didn’t just give Agilent greater heft. Varian expands its sales of consumables—the supplies and reagents necessary to operate scientific instruments. Consumable sales continue even when instrument buying may be affected by a slowdown “and take some of the volatility” out of company sales, Sullivan notes.
The acquisition also enlarges Agilent’s instrumentation offerings. It “brings us a whole new family” of spectroscopy, elementary analysis, and molecular spectroscopy products and technologies, Sullivan says. In addition, Varian adds expertise in nuclear magnetic resonance (NMR) and along with it magnetic resonance imaging capabilities that could enable therapeutic breakthroughs.
Richard Eastman, a senior analyst with investment banking firm Robert W. Baird, says the Varian acquisition also boosted Agilent’s exposure to the academic market. And the fact that Varian had a reputation for quality will also serve Agilent well, he notes.
Varian’s profit margins were lower than Agilent’s, Eastman says, indicating that Varian was probably not as efficient a manufacturer as its new owner. But Agilent’s manufacturing scale should allow it to extract better margins from its newly acquired businesses, he says.
Sullivan says he is confident that Agilent can improve on Varian’s manufacturing costs—that’s part of how Agilent will keep its promise to wring $75 million in annual cost savings out of the acquisition. “Varian’s manufacturing costs were 10% higher than ours,” Sullivan says. “I would submit we are a powerhouse in manufacturing. We are vertically integrated, and we own our manufacturing plants.”
Other savings will come from paring down real estate. The firm hasn’t determined which of the combined properties might be sold, but it has begun to consolidate some labs. For instance, the firm is moving Varian’s NMR research and demonstration labs in Walnut Creek, Calif., to Agilent’s corporate headquarters in Santa Clara, Calif., where the firm already runs customer demonstration labs.
Most of the employees associated with the new technologies that came with Varian will continue to work for the combined company. But one subject about which Sullivan is clear is that the Varian name will not survive. “We have one brand in this company, and it is Agilent,” he says. “While there can be no confusion about Agilent’s commitment to the Varian product lines, we are one company with 19,000 Agilent employees.”
Agilent’s business mix is rebalanced as a result of the integration. It is now less focused on its traditional electronics measurement business and more skewed toward analytical and life sciences instrumentation. About 53% of Agilent 2009 sales came from its electronics measurement segment, whereas 27% came from life sciences and 20% from chemical analysis. Adding Varian raises the life sciences and chemical analysis segments to 27% and 28%, respectively, and electronics measurement slips to 45%.
Agilent made no secret of the fact that its operations, a legacy of Hewlett-Packard, were too heavily concentrated in electronics measurement. “If you look at the overall $40 billion measurement market, the life sciences segment is the largest part, followed by the applied chemicals segment including food testing, environmental testing, and forensics,” Sullivan says. Third in size is electronics measurement for customers in communications, aerospace, and defense.
Sullivan doesn’t see any drawbacks in his strategy to focus on the life sciences. Even though major Western pharmaceutical makers are exporting research to company-owned and contractor labs in lower cost countries, Sullivan sees little impact on instrument companies. And government efforts to limit the cost of medicines are also unlikely to hurt instrument makers, he says.
“There is no evidence whatsoever that the life sciences market will get smaller,” Sullivan tells C&EN. An aging population in many developed countries and growing corporate and academic research in countries such as China and India mean that funding will still be available for health care research. With 70% of its business outside the U.S., Agilent “is probably the best positioned of any company in this marketplace” to capitalize on those growth opportunities, Sullivan says.
Nicolas H. Roelofs, president of Agilent’s Life Sciences Group, acknowledges that changes are now under way in the pharmaceutical industry as large prescription drug companies outsource research to small start-ups and contract research organizations, many of which are in Asia. From Agilent’s perspective, he says, sales to customers such as Pfizer and Sanofi-Aventis are not likely to be strong in the years ahead.
But as more people in developing countries become able to afford pharmaceuticals, sales of generic drugs will likely rise and along with them sales of instruments to generic drug firms in Asia, Roelofs says. And researchers will still need the most advanced tools to enable the discovery of new drugs. Roelofs also sees opportunities to supply biological measurement tools to research labs in Asia. GlaxoSmithKline and Roche, for instance, both have built significant biology research outposts in Singapore, he points out.
Agilent also sees diagnostic instruments as a growing opportunity. “We’re probably the market leader in the use of DNA microarrays for karyotyping” to research genetic disorders, Roelofs says. The use of these microarrays could help bring the promise of personalized medicine closer to reality, he says, and help Agilent stake out a strong position in the diagnostics market. Roelofs adds that new technologies from Varian, such as NMR, will open new doors and bring new business opportunities to Agilent.
Although the most promising markets for Agilent are life sciences and chemical analysis, Sullivan does not see Agilent shunning its electronics measurement business. During the 2009 economic slowdown, Agilent restructured that business to realize $310 million in annual savings. The firm also cut 2,700 people as a result. In doing so, Sullivan claims, the electronics business can make a 12% operating profit even at the bottom of the business cycle.
Keeping Agilent’s three business segments under one roof allows them to share measurement technologies—such as radio-frequency spectroscopy, X-ray crystallography, and magnetic resonance imaging—across market platforms. “Once you go behind these markets, what you are measuring is a photon, or an electron, or a molecule,” Sullivan says. The ability to draw on a number of measurement techniques “just gives us an enormous amount of differentiation,” he says.
As Sullivan sees it, Agilent’s job “is to provide the scientific tools for discovery.” Without measurement tools, few technical advances could be made. “We are uniquely positioned in the marketplace with the broadest technology to solve the really tough problems in a multitude of industries,” he says.
Once Varian is more closely integrated into Agilent, Sullivan says, he’ll be on the lookout for additional deals. “We will do both large acquisitions like Varian and bolt-on acquisitions,” he says. “Agilent will generate substantial amounts of cash going forward. The number one use of our cash is to accelerate the growth of the company.”
In a note to investors, C. Anthony Butler, an analyst with investment banking firm Barclays Capital, predicts that Agilent’s earnings will grow in many “hot” markets such as cellular analysis, imaging, and microscopy. Other areas such as food safety and environmental testing should also do well. He suggests that Agilent’s “solid balance sheet and cash flow metrics” position it to make further acquisitions and help it remain a strong competitor against other big instrument makers such as Thermo Fisher Scientific, Waters, and PerkinElmer.
But in a severe global economic slowdown, even well-positioned companies can suffer. Agilent’s sales, excluding Varian, fell 22% in 2009 compared with the year earlier. Since the 2001 recession, employee pay at Agilent has varied depending on the company’s performance. Last year, not surprisingly, pay generally fell. And Agilent asked all employees to take an additional 10% cut in pay.
The firm’s R&D spending slipped 9% to $642 million in 2009, mostly because it is based on labor costs, Sullivan explains. He maintains that Agilent kept up support for all internal programs, including development of mass spectrometers, DNA microarrays, and food safety testing. Moreover, he adds, as a percent of sales, the R&D budget has exceeded 12% over the past three years.
Because business has recovered this year, the firm’s employees, including its 3,000-plus R&D personnel, have seen their base pay restored and the variable-pay portion of their salaries increase.
Although Agilent’s R&D spending will be up this year, Sullivan isn’t prepared to provide a number. But one sure bet, he says, is that it will be higher, both because of increased labor costs and the addition of the roughly $60 million per year Varian spent on R&D.
“We’ve been number one in electronics measurement for almost our whole history,” and the life sciences and chemical analysis businesses have been growing steadily, Sullivan says. “I believe that with the combination of Varian, at our scale and scope, Agilent has a real chance of becoming the number one analytical company in the world.”