In the second acquisition worth over $1 billion in just over a month, Danaher has announced an agreement to acquire Life Technologies’ MS business and MDS Analytical Technologies for a combined price of $1.1 billion (see page 2). The deal brings a new player into the highly competitive MS market and enlarges Danaher’s presence in the lab automation and cell-analysis research instrument market. The deal will double Danaher’s annual sales of analytical and life science research instrumentation and related products to over $1.4 billion, based on IBO’s estimates (see IBO 4/15/09), and ends MDS’s participation in the analytical instrument market.

Danaher is no stranger to the analytical instrument market. Its Environment Technologies business, part of its Professional Instrumentation segment, includes Hach, a major provider of laboratory, field and online instruments and kits for the analysis of water quality. The company’s Medical Technologies segment, which the MS business will join, includes Leica Biosystems, a research instrument business that provides compound, stereo and confocal microscopes for life science and industrial applications, including cellular analysis. Also, Danaher Motion’s Dover business, part of the company’s Industrial Technologies unit, manufactures the low-cost Polonator G.007 next-generation DNA sequencer. In 2008, Danaher had revenues of $12.7 billion.

The announcement also ends the uncertainty that surrounded the fate of Life Technologies’ MS business after the merger of Applied Biosystems and Invitrogen last year (see IBO 11/30/08). As Greg Lucier, chairman and CEO of Life Technologies, put it on the company’s conference call discussing the deal, “mass spectrometry systems just don’t have that consumable trail,” referring to the disconnect between MS and the rest of Life Technologies, which is focused on biological reagents and instruments with a large consumables stream. Life Technologies told IBO that the sale includes Applied Biosystems’ reagents for protein identification and quantification. Regarding the current joint-venture arrangement for MS, under which MDS is responsible for R&D and manufacturing and Life Technologies handles sales and service, Mr. Lucier stated: “it is no longer the best approach to win in a more mature and competitive mass spec industry.”

Annual revenues from the MS joint venture total $525 million, with a third from the aftermarket, according to Life Technologies. MDS/Applied Biosystems is a provider of triple quadrupole, hybrid triple quadrupole/linear ion trap, Q-TOF, TOF/TOF and hybrid quadrupole/TOF (Qq-TOF) MS systems. Life Technologies estimates that sales for the business will be flat to down 10% this year. According to Life’s conference call, 900 employees will be transferred from Life Technologies’ side of the joint venture to Danaher.

Compared to Life Technologies, MDS’s motivation for the sale is very different. Following a strategic review of its businesses prompted by declining sales growth, operating losses and investor pressure (see IBO 2/15/09), MDS decided to sell both MDS Analytical Technologies and MDS Pharma Services, its early-stage drug development contract research business. MDS’s sole remaining business will be MDS Nordion, which supplies medical isotopes.

Revenues for MDS Analytical Technologies declined 21.3% to $266 million in the first nine months of the fiscal year ending October 31 (see page 12). For the same period, operating loss increased from $18 million to $25 million. MDS Analytical Technologies’ equity earnings from the MS joint venture declined 36.8% to $24 million. The Drug Discovery and Bioresearch business consists primarily of Molecular Devices. Acquired in 2007 for $621 million (see IBO 1/31/07), Molecular Devices provides microplate readers, microarray scanner, cellular imaging and analysis systems, microdissection products, microplate washers, automated electrophysiology stems, a label-free platform, as well as reagent kits and software for life science research. In addition to MS and Molecular Devices, MDS Analytical Technologies also manufactures ICP-MS systems for PerkinElmer. MDS Analytical Technologies has approximately 1,100 employees.

In its conference call, Danaher CEO Larry Culp, Jr., highlighted the businesses’ brands and technology leadership, explaining that the MS joint venture serves three broad areas: research, applied and clinical applications. Danaher noted its particularly interest in the clinical applications, stating that it plans to leverage its experience and presence in the clinical market through its Leica (which provides microscopy and related systems to histopathology labs and hospitals) and Radiometer businesses (a $450 million business that provides acute-care diagnostics).

Danaher also stated that the acquisition was a “tremendous strategic addition,” noting that the deal will add $650 million in revenues to its Medical Technologies segment (which consists of Leica, Radiometer, and the Sybron and KaVo dental product businesses), bringing segment revenues to nearly $4 billion. The acquisition increases Danaher’s life science and diagnostics revenues (which include Leica and Radiometer) by more than 40% to over $2 billion annually and expands the life science and diagnostics markets served by 50% to $9 billion.

Commenting on the attractive value-creation opportunity provided by the deal, Danaher noted that like Leica, the MS joint venture is a high gross margin business, with gross margins in excess of 50%, that was impacted by a complicated ownership structure. “Danaher offers a single cohesive ownership structure with a focused business strategy,” stated Mr. Culp. With the MS business’s operating margins currently in the lower teens, Danaher told analysts that in the longer term, if the business continues to grow in the mid-single digits, operating margins could get into the upper teens.

Danaher is well known for its commitment to lean manufacturing and continuous improvement encompassed by its Danaher Business System. These methods, along with manufacturing and operating synergies, should improve efficiencies in the MS business. However, the MS business also comes with its own R&D, sales force and service network. Molecular Devices appears to provide more synergies. Like Leica’s research business, Molecular Devices’ products target research labs doing cellular analysis. Danaher noted that it expects channel and “go-to-market” synergies for the Leica and Molecular Devices businesses.

On the same day that Danaher announced the acquisitions, it also announced an expansion of its 2009 restructuring plans, increasing the number of positions cut by 1,000 to 3,300 and the number of facilities to be closed by 14 to 30. Annual cost savings are expected to be $225–$250 million.