Hologic makes $6 billion plus bid for Cytyc

Plans announced May 20 by Hologic to spend $6 billion in stock and cash to buy Cytyc will forge one of the world's largest companies dedicated to women's health. It's a union of two firms focused on complementary areas.

Whereas Hologic's major focus is on the diagnosis of breast cancer, Cytyc's focus is on the diagnosis of cervical cancer. To lesser degrees, the companies address other complementary issues. Cytyc's product line covers applications such as preterm birth screening, treatment of excessive menstrual bleeding, permanent contraception, and radiation treatment of early-stage breast cancer; Hologic's line includes tests for osteoporosis.

Together, the companies would tally $1.7 billion in projected annual sales in 2008, and would hold market leadership in nine product areas.

In an analysts' conference call held May 21, Jack Cumming, Hologic's chairman and CEO, described the proposed merger as "truly a natural fit." Their products are recognized as best-in-class in the industry, according to Cumming. Combined, they offer a comprehensive portfolio that meets many women's health needs in screening, diagnostics, and therapeutics.

"This is critical to how this company is going to be perceived long-term and the benefits we will deliver," he said.

Both companies have a long record of 20% plus growth in annual earnings and revenue, according to Cumming, who noted that more than 90% of the two companies' revenues come from products with number one market share.

If the deal goes through, this growth trend would continue to be realized in the first year of the merged firm with revenues accretive to earnings, he predicted.

Under the terms of the agreement, Hologic would keep its name and Cytyc would become a wholly owned subsidiary. The two companies would have direct operations in more than 20 countries served by 3300 employees, including 1200 sales and service professionals. Cytyc's large international sales and service force, some 300 strong, might amplify Hologic's largely distributor-based network overseas, but Cytyc would benefit from Hologic's structure as well.

"The plan is to capitalize on our infrastructure internationally as well as on their value distributors internationally," said Patrick Sullivan, Cytyc chairman, president, and CEO, during the call.

Cumming and Sullivan are treating the proposed deal as a merger of equals, but Cytyc's $6 billion pricetag puts it well above the $3 billion market cap of Hologic. The deal would be made with 0.52 share of Hologic common stock and $16.50 cash for each Cytyc share.

If Hologic stock had remained where it was at Friday's market close, the deal would value each Cytyc share at $46.46 - a third more than before the deal was announced. But on Monday, shares of Cytyc common stock were trading about $4 below that level. There may be several reasons why.

First, the deal is not expected to close until September or October, a reasonable time for a deal of this size that needs shareholder and governmental approval. Contributing more to the moderation in value was the 10% drop in Hologic shares Monday morning, as the price per share tumbled more than $4 to $53.40 by mid-day.

Combining the two companies could produce an administrative bonanza, generating some $25 million to $30 million in annual cost savings through more efficient sales and marketing efforts, increased purchasing scale, and sourcing and logistical efficiencies. The two companies would be aided by their proximity to one another, as their headquarters are only 15 miles apart. If the deal goes through, they plan to remain separate with overall corporate headquarters at Hologic in Bedford, MA, and Cytyc remaining in nearby Marlborough.

But beyond savings, executives from the two companies are looking for gains from the way they do business. Because they share a customer base, ob/gyn specialists, one sales effort could ostensibly help the other. The two companies estimate that such cross-selling could enhance revenue growth by more than $75 million within the first three years, a prediction that Cumming calls conservative.

The two major proponents of this deal would hold ranking positions in the combined company. Sullivan would be chairman of the board and Cumming would be CEO. Glenn Muir will be executive vice president and CFO. Rob Cascella, Hologic's president, will remain in that role.

The proposed deal came together with surprising speed, given that the two companies only began talking about the possibility of a merger three months ago.

"Things heated up pretty fast," Sullivan said. "The obvious benefits of the combination made this a logical next step in the evolution of our companies."