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Jun 7, 2013

A Big Deal’s Winners and Losers

The benefits, and costs, of Thermo Fisher’s $13.6B Life Tech purchase.

A Big Deal’s Winners and Losers

Customers, employees, and shareholders do have something to gain from the combination of Thermo Fisher and Life Tech—but also something to lose. [© Andy Dean - Fotolia.com]

  • Hours after announcing his company’s $13.6 billion acquisition of Life Technologies, Thermo Fisher CEO and president Marc N. Casper wasted little time selling the deal as a win-win-win: “We believe the combination will create tremendous value for our customers, employees, and shareholders alike,” he told analysts on a conference call. Life Tech’s chairman and CEO Gregory T. Lucier weighed in similarly on the same call, declaring the combination: “a tremendous opportunity and the best path forward for our shareholders, our customers, and our team of employees.”

    Turns out, all three groups do have something to gain—but also to lose—from the combination of Thermo Fisher and Life Tech. The deal creates a powerhouse in biopharma lab instrumentation and supplies with more than 8,000 patents and licenses, combined revenues of $16.3 billion, and about 50,000 employees, including 2,700 scientists and 10,000 field sales and service employees.

    At a time of consolidation across the broader biopharma tools industry segment, Thermo Fisher expects the combo to compete better with its remaining rivals by being bigger.

    “We expect to achieve a greater share of wallet from existing customers by leveraging our combined commercial capabilities and depth and breadth of product lines,” Peter M. Wilver, CFO and svp, said during the call.

    Simple economics show that over time, consolidation can mean higher prices for customers as fewer market players means reduced competition. Even in Life Tech’s specialty of gene sequencing, where competition and innovation have driven down costs, biopharmas are unlikely to see any savings since they’ll need to spend more on data storage and interpretation, as Aabha Khemani and Gauri Jaju noted last year in GEN.

  • 10,000 New Colleagues

    Thermo Fisher’s Casper has trumpeted the benefit of a larger workforce. “We look forward to welcoming 10,000 new colleagues to our team,” he said.

    But as he noted in the conference call, and as both companies noted in their initial press release, Thermo-Life Tech seeks to cut $250 million in costs by combining global infrastructure, starting with $85 million in the first year after the deal, set to close early in 2014.

    Inevitably, that spells reductions to the combined workforce of 50,000, through layoffs or attrition. Last year, Thermo Fisher cut 1,120 jobs, carrying out an ongoing consolidation following 12 company acquisitions and two divestitures between 2010 and 2012.

    In a research note, Cowen & Co. analyst Shaun Rodriguez, Ph.D., said efforts by Thermo to find a buyer for Life Tech’s next-generation Ion Torrent sequencers may have ended the sales process, though it’s too soon to know what Thermo may sell off.

    “If [Thermo] holds onto Ion, history suggests that [Thermo] will apply much more operational discipline,” Dr. Rodriguez said. That would pose a competitive challenge for sequencing leader Illumina, since Ion Torrent has driven recent growth for Life Tech.

    Lucier has said Life Tech will have programs designed to retain employees between the April 15 signing and the deal close “so that we can deliver a terrific, well-functioning organization to Marc and his team.” But he cannot assure Life Tech staffers their jobs will survive inevitable Thermo Fisher cost-cutting, with one exception: According to the press release announcing the deal, “it is expected” that Life Tech president and COO Mark P. Stevenson “will have a significant leadership role in the combined company.”

    Casper and Lucier insist the acquisition will make winners out of shareholders, and fast—adding $0.90 to $1 to Thermo Fisher’s adjusted earnings per share, which finished 2012 at a record $4.94, 19% above 2011. Thermo has projected an EPS range this year of between $5.32 and $5.46, 8% to 11% over 2012, not counting any future acquisitions or divestitures.

    Not all shareholders share Casper and Lucier’s enthusiasm, however. As of May 15, eight shareholder lawsuits had been filed seeking to stop the deal: four in California, home state of Carlsbad-based Life Tech; the rest in Delaware.

    The shareholders, all seeking class-action status, fault Life Tech for not seeking more than the 12% premium of the deal’s $76-a-share price, about 12% above Life Tech’s April 12 closing price of $68 per share. Not acknowledged in the suits is that the 12% is on top of a 25% jump in share prices since January, when Life Tech acknowledged hiring consultants for a strategic review. But as plaintiffs noted, the typical premium of 1,941 biotech acquisitions tracked by Bloomberg over the past five years was 53%.

  • $340 Million Windfall

    Plaintiffs also say the deal unjustly enriches—at the expense of Life Tech’s top shareholders—company officers and directors who held 2.6% or 4,476,846 shares of common stock as of March 15.

    “If the proposed acquisition closes, the board and company management will receive over $340 million from the sale of their illiquid holdings. Thus, board members are conflicted and serving their own financial interests rather than those of Life Technologies’ other shareholders,” Chang Choi and Evan Noch stated in separate, but similarly worded lawsuits.

    Choi, Noch, and another plaintiffs noted officers and directors would receive a total $94.6 million in change-of-control payments, including more than $43 million in severance to Lucier, or $12 million if he is terminated with cause. That doesn’t include cashing in on shares. Lucier would make at least $34.7 million on the 456,046 shares he owned directly as of March 6—not counting deferred-compensation shares, restricted stock units vesting within 60 days, or 1,251,160 extra shares tied to 60-day options.

    “The proposed acquisition is the product of a hopelessly flawed process that is designed to ensure the sale of Life Technologies to Thermo Fisher on terms preferential to defendants and other Life Technologies insiders, and to the detriment of the plaintiffs,” the Louisiana Municipal Police Employees’ Retirement System concluded.

    Replied Thermo Fisher in a proxy statement: “The company and its directors believe that the claims in each of these lawsuits are without merit, and they intend to vigorously defend all pending actions relating to the merger.”

    Thermo Fisher’s winning bid for Life Tech came in 31% above its initial offer of $58 a share, according to a Life Tech proxy statement. Thermo Fisher bested 10 parties that expressed interest in purchasing Life Tech, five of which submitted formal bids. Thermo’s initial offer was a 43% premium over Life Tech’s $40.54 closing stock price on September 15, 2011. While that would seem to favor the plaintiffs, Thermo’s offer topped a $75 per-share “best and final” proposal from an undisclosed “Strategic Party A” and $65 per-share from a consortium of undisclosed financial firms.

    Even when Thermo was matched by an eleventh-hour offer from Strategic Party A (which Reuters identified as Sigma-Aldrich), Thermo still sealed the deal during a limited exclusivity period. Plaintiffs say stipulations meant to preserve the deal—such as a $485 million penalty if Thermo’s offer is abandoned for a superior proposal and Thermo’s right to match competing bids—“make solicitation and/or entertainment of a competing deal difficult, if not impossible.”

    While the shareholders may think more bid-seeking for Life Tech might have pushed the sale price higher than the final $76-per-share, that would be hard to prove in court. A longer bidding war could just as likely have driven away at least some of the 10 interested parties kicking the tires on Life Tech, reducing the likelihood of that higher premium the plaintiffs now want a court to deliver. Such an outcome would indeed hurt the customers, employees, and shareholders that all sides say they want to help.


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