Philips makes strong bid for position in ultrasound with offer to acquire ATL

Deal comes after years of false starts in modality at Dutch company

Industry consolidation continues to reshape the ultrasound market. ATL Ultrasound and Philips Medical Systems became the latest players to participate in the market's restructuring when they announced on July 29 that Philips' parent, Royal Philips Electronics of the Netherlands, would buy ATL in a deal valued at $800 million.

The acquisition will be made formally on Aug. 4 as a cash tender offer for all outstanding ATL shares at a price of $50.50 a share. That price represents a healthy premium over ATL's closing share price of $42.63 the day before the merger was announced. Shareholder and regulatory approvals must still be achieved, but neither company expects any significant roadblocks. The deal could be finalized by the end of September or early October.

The acquisition will catapult Philips into the top ranks of ultrasound manufacturers. Ultrasound is one of the fastest growing medical imaging modalities, with global annual revenues of $2.5 billion, and is second only to x-ray in total size. Despite the market's promise, Philips has not fielded a strong ultrasound offering, and the company risked being left behind by other multimodality OEMs that have strengthened their positions in the modality.

Philips originally tried to develop its own ultrasound manufacturing capacity in-house, an effort that ended in 1994 with the closure of the company's Philips Ultrasound division in Santa Ana, CA. The company then partnered with Hewlett-Packard of Andover, MA, in a collaboration that produced the SonoDiagnost 800 Plus mid-range scanner. Even with that system, Philips was unable to raise its North American market share above the single-digit range. Philips earlier this year reported that it would only sell SD 800 Plus in North America as part of multimodality package deals (SCAN 2/4/98).

While Philips struggled in ultrasound, its competitors pressed on. Toshiba has held on to the top spot in ultrasound, thanks to its strong international presence, while Siemens and GE won success in developing their own scanners in-house. GE then raised the ante by acquiring Diasonics Vingmed Ultrasound of Milpitas, CA, in April (SCAN 4/29/98). The developments left Philips and Picker International of Cleveland as the only major multimodality vendors without strong ultrasound offerings.

In the meantime, ATL continued to demonstrate how a single-modality company can thrive in a radiology industry dominated by multimodality giants. The Bothell, WA, firm's exclusive focus on ultrasound has enabled it to maintain the technological edge needed to lure potential customers. ATL's HDI 5000, HDI 3000, and HDI 1000 are among the best scanners in their respective price segments, and the company is the only ultrasound manufacturer to have premarket approval from the Food and Drug Administration to market its scanners for the differentiation of breast lesions.

ATL's success was exemplified in financial results released concurrently with the Philips acquisition announcement. For the second quarter (end-July), ATL's sales were $111.7 million, up 11% compared with revenues of $100.8 million in the same period the year before. The company posted net income of $5.5 million, more than double the $2.5 million net profit recorded in the second quarter of 1997. ATL had annual sales of $430 million in 1997 and a global market share of about 12%.

A hazy future. That said, ATL executives may have seen the writing on the wall. The rise of the multimodality OEMs in ultrasound has been an ominous sign. In addition, equipment purchasers are consolidating into larger groups that increasingly prefer buying equipment as part of large, packaged deals that can include several modalities. ATL executives have been examining the possibility of a collaboration with a multimodality OEM for some time, according to Cass Diaz, ATL's senior vice president of worldwide marketing and sales.

"We have, as part of our strategic planning process, always been looking at the possibility of some alliances or partnerships with the right multimodality company," said Diaz. "We felt that, with the way this market is developing, and also the way the managed care environment is developing, we need to leverage our resources more effectively."

Details of the acquisition remain to be worked out, but some facts are already known. ATL will become a wholly owned subsidiary of Philips Medical Systems, with Bothell becoming the world headquarters for Philips' ultrasound business. ATL senior management are expected to remain in control, although company executives are already hinting that chairman and CEO Dennis Fill could retire after the deal is closed.

Other issues remain to be resolved, however. ATL's products are a good fit with those of Philips, but ATL's sales and marketing structure may need adjustment, especially if ATL is going to gain an advantage from being part of a multimodality company. There is also the potential for a culture clash between the firms as Philips tries to meld its conservative approach to the medical imaging market with ATL's more entrepreneurial style. Diaz believes that Philips will avoid making any changes that could jeopardize the success of its new acquisition.

"They (Phillips) are well aware of what ATL has achieved," Diaz said. "The successes and the market position that this company has developed are the result of focus, dedication, and a passion for the ultrasound business. They don't want to tamper with that."

Philips executives echo this belief. Philips intends to let ATL map its own course, according to Jeremy Cohen, director of Philips media relations in Amsterdam.

"We have made it quite clear that we will not go into ATL and tell them how they should be running high-end ultrasound," Cohen said. "They have a proven track record, very sound financials, and the technology in place there is fantastic."

The most intriguing questions that remain following the Philips/ATL deal regard those companies still awaiting a partner in the ultrasound consolidation dance. ATL's arch-rival, Acuson of Mountain View, CA, might find the prospect of going it alone in the market unappetizing and could begin seeking a partner with deep pockets. A potential suitor could be Picker, which has no operations in ultrasound, or Hewlett-Packard, which has expressed interest in growing its position in the radiology ultrasound market.