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Agilent s Sale of Semiconductor Business Could Bolster New Bio-Analytical Segment

After months of speculation about a rumored sale of its semiconductor unit, Agilent Technologies said this week that it would sell the segment to private equity firms Kohlberg Kravis Roberts and Silver Lake Partners for $2.66 billion.

By shedding a laggard that has been a drag on profitability, Agilent has enabled itself to focus more on growing its Life Sciences and Chemical Analysis group, which will be renamed the Bio-Analytical Measurement business. That segment has been one of the firm's more predictable and profitable businesses.

There will be "a lot more focus on the core competencies of the company, where we started many years ago, in measurement," said Chris van Ingen, head of the LSCA unit, in an interview with BioCommerce Week. "We'll be a lot more nimble, a lot faster."

Agilent executives reiterated statements from earlier this year that the firm has not paid enough attention to its life sciences business, and that it hasn't persuaded Wall Street to take a closer look at the unit's performance (see BioCommerce Week 3/10/2005). Getting investors to recognize Agilent as a life-science contender could embolden the company to beef up innovation and hunt for acquisitions.

There will be "a lot more focus on the core competencies of the company, where we started many years ago, in measurement. We'll be a lot more nimble, a lot faster."

"In the bioanalytical marketplace, we're number one in gas and liquid chromatography, and we have enormous opportunity in this space," said Bill Sullivan, Agilent's president and CEO, during a webcast following the announcement. "Moving forward, we will continue to make a large effort to expand our market share inside of the analytical area.

"We are still in a very strong cash position," Sullivan added. "These changes will put us in a strong position to make strategic acquisitions." Agilent finished the third quarter with $2.8 billion in cash and cash equivalents.

Sullivan cited Waters, Thermo Electron, and PerkinElmer as chief competitors for the Bio-Analytical unit. The firm is a distant second in the microarray market behind Affymetrix and is considered a second-tier mass spectrometry player.

But there are plans to expand its reach in the markets it already serves, particularly the mass spec field. "We recently announced that we will introduce a tripole in the fourth quarter of this year, and we'll also have the QTOF at the beginning of [next] year," van Ingen said. "We'll continue to look in the organic spectroscopy side to see what we can do to extend our footprint, either through alliances or other opportunities."

He added, "But if you look at newer applications, we're focused on genomic hybridization, location analysis, methylation, splice-variant analysis."

Agilent also has made a concerted effort to raise its profile in the informatics market, acquiring Silicon Genetics last August, Computational Biology in January, and Scientific Software last month. Buying the informatics businesses was key to the establishment of Agilent's integrated biology business, according to van Ingen.

The life sciences unit "is the strongest, steadiest, most profitable business Agilent has, and the most fertile for both organic and inorganic growth," CFO Adrian Dillon said during the webcast. "Our market position in this space is not as great as it is in the electronic measurement space," he added. But the firm expects to leverage its place in the chromatography market to sell other bioanalytical products.

The firm estimates the bioanalytical market at $20 billion — roughly equal to the market served by the other unit Agilent is keeping, the newly renamed Electronic Measurement business (formerly the Test and Measurement business).

The combined overall growth rate for these two markets is about 8 percent, Dillon said. But Agilent's goal is to grow both businesses at a rate of 10 percent or greater, both organically and through acquisitions. He also noted that collaborative R&D opportunities between the two remaining segments, particularly in nanotechnology and homeland security, could give the firm a leg up against competitors.

Semiconductor Tail Wags Diversified Dog

Company officials have been continually frustrated that the stock market appeared to value the company against pure-play semiconductor businesses rather than as a diversified company that comprises other, more profitable businesses. Investors clearly supported the firm's decision to divest the semiconductor unit and narrow its focus, sending Agilent's shares up 15 percent to close at $30.33 on Monday, the day the announcement was made.

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In considering the firm's stock performance in recent years, Dillon said that it has been the "semiconductor tail wagging the test and measurement dog" — an appropriate metaphor when also considering the semiconductor unit's drag on the firm's profitability. Though the semiconductor unit reported strong gains in profitability in the third quarter compared with the previous few quarters (see chart), the unpredictable nature of its returns made it expendable.

Agilent has not been known on Wall Street primarily for its life sciences business — it lacks best-in-class products for most of its instruments. But the LSCA unit had returned double-digit quarterly revenue growth for six consecutive quarters ending with the firm's second quarter this year.

Although the LSCA unit reported quarterly revenue growth of only 3 percent to $344 million in the company's second quarter ended April 30, the unit outshined the firm's overall performance: a 5-percent decline in second-quarter revenue to $1.7 billion.

For the third quarter ended July 31, the results of which were also announced this week, the LSCA unit posted revenue of $341 million, a 2-percent increase over $335 million in the year-ago period.

Dillon noted that sales during the third quarter were hampered by the late introduction of the firm's gas chromatograph/mass spectrometer system. He said that the company had a backlog of orders for the instruments worth more than $100 million, and it expects to deliver those backlogs in the fourth quarter, which would return the unit to double-digit revenue growth.

Operating profit for the LSCA unit fell to $42 million in the quarter from $45 million in the equivalent period of 2004. Excluding the impact of recent acquisitions, profits for the LSCA group were flat year over year, the company said.

In the Test and Measurement segment, revenues in the third quarter declined 8 percent year over year to $705 million. Revenues for the Automated Test group were down 21 percent at $192 million, and revenues for the Semiconductor Products business declined 2 percent to $450 million.

The Restructuring Plan

The divestiture and reorganization includes the sale of Agilent's 47 percent stake in lighting company Lumileds to Royal Philips Electronics for $950 million and the repayment of $50 million in debt, and plans to spin off its system-on-a-chip and memory test businesses, which comprise the firm's Automated Test unit, next year. It also will include 1,300 job cuts — or roughly 34 percent of its workforce after the divestitures — through layoffs, attrition, and transfers to the divested businesses.

Agilent expects the moves will reduce its global infrastructure costs by $450 million. Although it also expects to incur $200 million in restructuring costs, company officials said those costs would be offset by proceeds from asset sales including the elimination of 11 sites. It did not provide details of what sites would be shut down or divested.

Agilent said that it would use proceeds from the divestitures to immediately embark on a $4 billion share repurchase program and call its $1.15 billion convertible debenture. But there is little doubt that the firm also intends to use the funds to pursue a more aggressive acquisition strategy.

Overall, Agilent reported a 10-percent decrease in total fiscal third-quarter revenue, which dropped to $1.69 billion from $1.89 billion in the prior-year period. Revenues for the three month period ended July 31 fell below the company's expectations of $1.7 billion to $1.8 billion for the quarter.

Agilent's net earnings for the quarter rose to $104 million, or $.21 per share, from $100 million, or $.20 per share, in the third quarter last year. But once charges, tax benefits, and other one-time items are excluded, net earnings came to $142 million, or $.28 per share, down from $154 million, or $.30 per share, year over year.

"Revenues were slightly below our expectations because of weak wireless test and life sciences markets," said Sullivan. "As you all know, the pharmaceutical industry is going through a re-evaluation, and as a result of that there is some concern. We believe we have a very strong product portfolio and we'll be able to maintain our position, [and] the generic marketplace continues to heat up and we're very well-positioned there."

Not including any additions that might be made over the next year, the firm said in fiscal 2006 it would have roughly $5 billion in revenue, down 17 percent from what it expects to report for fiscal 2005, but up 7 percent on an apples-to-apples comparison. Agilent forecast fourth-quarter revenue of $1.79 billion to $1.89 billion and operating earnings per share of $.33 to $.38.

— Edward Winnick ([email protected])

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