Difficult financial climate challenges Philips’ acquisition of Marconi

Executives at Royal Philips Electronics and Marconi plc are struggling to finalize a deal that would join their medical businesses. The two sides appear committed to the acquisition, but their efforts are being challenged by a severe downturn in the telecommunications industry, Marconi’s core business. Meanwhile, contradictory reports are surfacing as to what the deal will actually look like when it is completed.

Philips agreed in early July to pay $1.1 billion for Marconi Medical Systems, which was well below Marconi’s asking price of around $2 billion. The acquisition, which had been rumored for months, is intended to strengthen Philips’ ailing CT business, as well as expand its MR and nuclear medicine divisions. The deal should also help Marconi focus on its core communications products and services, while beefing up cash reserves.

Since the deal was announced, however, the details have remained fuzzy and the waters are becoming ever murkier. Early reports from the companies failed to note that Marconi’s PACS business was not part of the purchase. Marconi is now in the process of “looking at other options” for its PACS business, according to a well-placed source at the company, who suggested that Philips could yet end up with this piece of Marconi as part of a separate deal.

It is also unclear what will happen to Marconi Medical Systems’ Health Care Products (HCP) division. Marconi plc maintains that Philips has clearly stated its intent to sell off this division after the deal is finalized. HCP markets consumables such as film, chemicals, and lead aprons and lately has added some capital equipment to its offerings. But Philips claims it has yet to decide the fate of the HCP group. Philips officials reportedly are continuing to review the HCP business as part of their due diligence. Industry insiders note, however, that HCP’s product line and e-commerce model would be a new direction for Philips Medical, which is primarily an equipment company, and that it might not make good business sense for it to keep HCP.

Perhaps the largest issue to emerge is Marconi plc’s recent financial struggles, which the company blames on telecom equipment sales falling faster than it can cut costs. After trading at a 52-week high of $29 per share last October, Marconi has watched its stock price plunge to just 86¢ per share in early September (it closed at $1.07 per share on Sept. 10). Thousands of Marconi employees have been laid off in recent months, and its CEO and chairman have both resigned. The company’s debt grew from $4.7 billion in May to $6.45 billion at the end of August, and its latest financials show an operating loss of $333 million on sales of $1.65 billion for its first fiscal quarter (end June 30).

All this has had a profound effect on Marconi plc’s market capitalization, which stood at just $1.49 billion on Sept. 10. And it now makes Philips’ $1.1 billion offer for Marconi Medical Systems seem high. While company officials refused to comment, it is possible that Philips is reconsidering the original deal in light of recent developments. Among the options are renegotiation of the price, inclusion of the Marconi PACS business, or acquisition of the entire company at a fire sale price. In any case, the two companies are struggling to keep history from repeating itself.

Some 13 years ago a proposed merger of Philips and Marconi Medical Systems (then known as Picker International) fell apart largely because of valuation problems caused by a chaotic international currency market. Marconi’s CT business is viewed by Philips executives as a critical part of the acquisition (see cover story, this issue) and may, in itself, warrant extraordinary measures to keep the acquisition on track.