Merck/Millipore: Merck is paying up for growth and balance. The family controlled German drugs and chemicals maker will pay $7.2 billion in cash for U.S. laboratory equipment maker Millipore. That sum, just under half Merck's own enterprise value, is a premium of almost 50 percent over the target's share price at the start of 2010.
At around 15 times Millipore's forecast earnings before interest, tax, depreciation and amortisation (Ebitda) for 2010, according to Reuters Estimates, the price looks high. After expected annual synergies of $100 million kick in, in three years, that multiple should fall to 12.5 times, still almost twice Merck's own.
Investors may wonder why the board was willing to be so generous to Millipore's shareholders so soon after being cautious with its own. Less than a week ago, Merck unexpectedly cut its dividend by a third despite having almost no debt at the end of the year.
Yet, the two moves are linked. An uncertain outlook for Merck's drugs pipeline was a big factor in the dividend cut. So diversification away from the dependence on pharma, which generated 75 percent of Merck's revenue and earnings last year, sounds like a good idea. Adding Millipore to the mix would bump up the chemical division's share of revenue by 10 percentage points.
In fairness, Millipore is attractive. Its 25 percent Ebitda margin in 2009 was higher than Merck's overall 21 percent. Millipore's revenue also grew faster, and while the new purchase will sit in Merck's chemicals division, its dependence on the healthcare business will reduce Merck's dependence on the highly cyclical and competitive business in liquid crystals, which are used in flat-screen TVs.
Nonetheless, Merck had to pay enough to overcome an unsolicited bid from the US laboratory equipment maker Thermo Fisher , according to a person familiar with the situation. Millipore's board support the deal, but the shareholders still have to vote. While waiting, Merck's shareholders will be wondering about the cost of growth.
