Summary
- A Thermo Fisher - Quest Diagnostics merger would have numerous cost synergy and sales growth possibilities.
- Margins/returns for the businesses are similar, and a mostly-stock transaction would be strongly accretive to Thermo.
- A fully-integrated testing company would quickly overtake the industry, and give pricing power to its owner.
In 2006, Thermo Electron and Fisher Scientific merged to create today's leading laboratory supplier of equipment, kits, instruments, reagents, chemicals, software and consumables. Part of the company's successful growth story for decades has been the use of accretive acquisitions of similar businesses from existing cash and business income generation. In addition, this growth strategy continues today, sometimes with unexpected hiccups.
Last month, Thermo Fisher Scientific (TMO) announced it was terminating a $12 billion purchase offer for diagnostic test maker Qiagen (QGEN). The merger deadline was Monday, August 10th, contingent on at least 66% of Qiagen shares being tendered. With only 47% of shareholders agreeing to the deal, Thermo decided to walk away, instead of increasing its offer price a second time. The good news is Thermo will receive a $95M payment from Qiagen per contract terms for its effort. Fellow Seeking Alpha author Gary Gambino wrote an interesting article on the logic for terminating the deal here.
So, what kind of transaction should Thermo look for next, with $6 billion in cash on the balance sheet at the end of June, raised in preparation for the Qiagen takeover? I think the company should review the math and logic of directly entering the laboratory testing service field. In this theoretical exercise, I will attempt to demonstrate the basic thought process, merger/acquisition teams use to determine the value of a combination before making a bid.
