Germany's Merck to Pay Top Dollar for Millipore


Last week, shares of laboratory supply maker Millipore (MIL) spiked 34% to $94.41. There was lots of buzz about a takeover, and some of the possible suitors included Thermo Fisher Scientific (TMO) and even GE (GE).

The takeover rumors turned out to be true, but the buyer was actually Merck KGaA, the German pharmaceutical giant. It agreed to a $7.2 billion deal (which includes the assumption of debt) or $107 per share in cash. The transaction should close in the second half of this year.

As a sign of the improvement in the financing environment, Merck was able to get term loans from a syndicate of banks, including Bank of America (BAC), BNP Paribas and Commerzbank.

A High-Priced Lab

Back in 1954, Jack Bush started a filtration company, which eventually turned into Millipore. Now it has 5,800 employees and $1.6 billion in revenues. Millipore has a diverse platform of lab products (which number over 20,000). These include tools that help with isolation and purification of biomolecules, sample preparation, process monitoring and diagnostics.

Because of its strong product offerings and smart acquisitions, Millipore has certainly been a nice growth story. Since 2004, revenues have climbed at a 13% annual compound growth rate. During this time, operating margins have grown from 16.8% to 21%.

In the most recent quarter, Millipore posted net income of $44 million, or 78 cents per share, up from $31.1 million, or 56 cents per share in the same period a year ago.

Right Place, Right Time

The global pharmaceutical industry is facing some tough challenges. Patents on a variety of megadrugs will expire over the next few years. At the same time, it's getting tougher and more expensive to find replacements. There is also the intense competition from generic drug operators.

To deal with these problems, pharma companies are looking at acquisitions as a way to boost revenues, while moving away from risky drug development. So, it should be no surprise that Millipore has become an attractive asset, especially for Merck. After all, the company had a lackluster quarterly report and an adverse regulatory ruling on its Erbitux drug.

True, with the Millipore deal, Merck will get a strong boost in revenues and $100 million in cost savings, which are expected to kick in within three years. But the price tag is high. Keep in mind that Millipore used an auction to sell itself, which apparently was heated. For example, it looks like Thermo Fisher bid $95 per share. So, more offers are unlikely -- and no doubt, Merck will need to work aggressively to make the deal pay off.