The analytical instrument industry will soon add another multibillion-dollar company to its ranks. Late last month, Agilent Technologies announced an agreement to acquire Varian Inc. for $1.5 billion (see IBO 7/31/09). Agilent Bio-Analytical Measurement (BAM) is currently the world’s third largest provider of analytical and life science instrumentation (see IBO 4/15/09). Varian is the 11th largest provider.

The acquisition will mark an important change for Agilent, as it will shift the majority of the company’s revenues from the Electronic Measurement business to the BAM business. In fiscal 2008, 40% of Agilent’s $5,774 million in revenues was generated by BAM and 60% was generated by Electronic Measurement. Such a move is not surprising, given that BAM is the faster-growing business. From fiscal 2004 through fiscal 2008, BAM has a combined annual growth rate (CAGR) of 14%, compared to 4% for Electronic Measurement. The four-year CAGR for Semiconductor and Board Test Measurement, a third business unit created early in fiscal 2009 that consists of product lines that were formerly included in Electronic Measurement as well as BAM’s laser interferometer products, declined 6%.

The global recession has accelerated this trend. As the Electronic Measurement business has wrestled with substantial downturns in the electronic and semiconductor markets, BAM has continued to grow sales in the academic; government and food safety markets, benefiting from a diversified customer base. In the first six months of fiscal 2009, BAM sales declined 4% to $1,023 million, including a negative currency impact of five percentage points. Electronic Measurement sales dropped 28% to $1,154 million, including a negative impact of two percentage points from currency effects. Revenue for Semiconductor Board and Test fell 56% to $80 million.

However, Agilent’s interest in Varian is not new. Since 2006, Agilent and Varian have discussed at various times how they might work together, according to Varian’s proxy filing with the SEC regarding the acquisition. Last October, Agilent made an initial, unsolicited “non-binding indication of interest” in Varian for $60 per share. JP Morgan was engaged by Varian in November 2008 to act as a financial advisor to evaluate strategic alternatives. A revised offer from Agilent for $55 per share in November was rejected by Varian’s Board. However, the two companies continued to engage in discussions. In May, Varian’s Board authorized talks with Agilent about a possible transaction. Over the next three months, Agilent, as well two of the three undisclosed companies, which JP Morgan was authorized by Varian to approach, submitted non-binding offers for Varian. On July 27, Agilent’s proposed acquisition for $52 per share was announced.

The acquisition would bring several new product lines to Agilent BAM, as well as extend Agilent’s offerings in atomic spectroscopy, chromatography, MS, sample preparation and consumables. One of the more intriguing aspects is the addition of NMR, MRI and FT-MS to BAM’s Life Science business. Both NMR and FT-MS are moving toward becoming more mainstream techniques. Agilent has a history of entering markets at the time of such transitions. NMR and FT-MS would also further Agilent’s offerings for the academic life science research market and, specifically, for structural biology and metabolomics. Likewise, Varian’s X-ray crystallography systems would provide Agilent with greater exposure to structural biology applications. Varian’s MRI business, which includes instruments for research and clinical applications, as well as its tests for drugs of abuse would increase Agilent’s products for clinical markets.

In atomic spectroscopy and molecular spectroscopy, Varian would add numerous techniques to Agilent’s current product lines. In atomic spectroscopy, Agilent offers ICP-MS, but Varian would add atomic absorption and ICP-OES spectroscopy, as well as another ICP-MS product. In molecular spectroscopy, where Agilent currently provides a diode array–based UV-Vis system, Varian would add fluorescence, FT-IR, IR and Raman spectroscopy. In some cases, the additions would create product overlaps, or Agilent may chose to narrow their offerings through divestment.

Another technology segment where product overlap would exist is MS. Both companies offer single quadrupole, triple quadrupole and ion trap MS. But, as noted earlier, Varian would add FT-MS to Agilent’s MS technology line up.

In chromatography, both companies offer LC and GC systems and columns. However, Varian has a sizable preparative and process chromatography business, which would increase Agilent’s presence in that market, for which the aftermarket is especially important. Varian also offers a number of LC techniques that Agilent does not, including size exclusion chromatography, flash chromatography and thin layer chromatography. Finally, Varian’s sample preparation products would increase Agilent’s offerings in this high-margin area.

As the potential for overlapping product lines shows, combining the two companies would be a major undertaking, but one that would position Agilent as a broader supplier. It would also make Agilent one of the few suppliers offering FT-MS and NMR, further solidifying its place in the life science research instrument marketplace.