Thermo Fisher Scientific have further cemented their reputation as a serial acquirer with the purchase of FEI Company for approximately $4.2B in cash. Oregon-based FEI Company are world leaders in the design and manufacture of high-performance electron microscopy instrumentation, employing over 3000 employees worldwide. FEI Company had 2015 revenues of $930 million and will become part of Thermo Fisher’s Analytical Instruments Segment, complementing Thermo’s position as Mass Spectrometry leaders and creating new opportunities for Thermo to expand their presence in the Materials Science market.
This acquisition positions Thermo Fisher as the market leader in the Electron Microscopy Market, with approximately 45% share. Thermo President & CEO Marc Casper notes that “in life sciences, there is growing adoption of electron microscopy to study the structure of proteins. The technologies we gain with FEI will complement our mass spectrometry leadership, putting Thermo Fisher in the best position to capitalize on this important trend.”
Of note is the fact that this acquisition brings Thermo into contact with sectors that they current have a limited engagement with, namely the Semiconductor and Oil & Gas industries which constitute 47% of FEI’s revenue. FEI’s remaining revenue is derived from sales to the Life Sciences and Materials Science sectors, for which the long-term market prospects are excellent, especially when combined with Thermo’s capabilities in mass spectrometry.
Some analysts have speculated that this is the start of a strategy which is seeking to diversify Thermo Fisher from a Life sciences-focused multi-offering and service conglomerate, to a company that that is diversifying revenue opportunities by expanding into alternative sectors in a manner similar to Agilent Technologies.
However according to Evolution Bioscience Director Dr. Frank Rinaldi, “a shift from a Life Sciences focus is unlikely at this time, and divesture of this portion of the FEI business may be on the cards going forward. It is notable that Thermo Fisher’s presentation on the acquisition had no focus on the Semiconductor or Oil & Gas industries, but rather focused on the strategic fit within the Life sciences sector.”
“As a company, Thermo Fisher Scientific have displayed a strong understanding of the markets it plays in, and historically has been well managed through extensive high-profile M&A activities in recent years,” notes Dr. Rinaldi. “Sectors such as Semiconductor and Oil & Gas are notable for their highly cyclical natures, with current low oil prices impacting capital expenditures. Virtually all players offering products and services at this point in time are reporting reduced revenue for this reason. In other words, these are not the type of markets that Thermo favours.”
Based on current estimates, sales to the semiconductor and Oil & Gas industries would be likely to contribute 2.3% to Thermo Fisher’s overall top line at most. Assuming no further capital deployment in 2016, Thermo expect a pro forma leverage ratio of about 3.6x total debt to combined adjusted EBITDA. Due to its strength of cash flow, Thermo Fisher should be back at their target leverage ratio within 12 months of close of acquisition.
As such, a divestiture strategy is more appropriate for Thermo Fisher as it would have the additional benefit of contributing to debt leverage reduction. In other words Thermo does not need to divest, but such a strategy would facilitate further capital deployment in a rapid timeframe, allowing the company to continue its M&A strategy without cashflow delays.
Given Thermo Fisher’s proclivity for M&A activity, it is highly likely that the FEI Company acquisition will result in future divestiture of FEI’s non-Life Sciences portfolio in the coming months and years, thereby enabling Thermo Fisher to ensure ongoing liquidity and to continue growing the company through strategic acquisitions.
To view Thermo Fisher Scientific’s full press release regarding the FEI Company acquisition, please click here.