Spin-off from Bayer may give Agfa opportunity to manage its own growth

October 1, 1998

Spin-off from Bayer may give Agfa opportunity to manage its own growthVendor may have more breathing room as independent Film and PACS vendor Agfa may get more room to run as a result of the decision by parent firm Bayer to spin off

Spin-off from Bayer may give Agfa opportunity to manage its own growth

Vendor may have more breathing room as independent

Film and PACS vendor Agfa may get more room to run as a result of the decision by parent firm Bayer to spin off the company in 1999. Bayer executives announced the decision in September as part of the company's desire to focus on core businesses.

Bayer said it plans to list up to 75% of Agfa shares on the public markets in the second quarter of 1999, assuming that conditions in the capital markets are favorable. Bayer is making the move because of the differences between Agfa's core markets and those of Bayer. At the same time that it announced the Agfa spin-off, Bayer reported that it plans to buy the in vitro diagnostics business of Chiron for $1.1 billion, bolstering Bayer's operations in the life sciences sector.

Bayer's move puts an end to several years of speculation regarding Agfa's position in Bayer's corporate portfolio. Bayer, of Leverkusen, Germany, acquired an ownership stake in Agfa, of Mortsel, Belgium, some three decades ago. At the time, the acquisition made sense: As a film company, Agfa relied heavily on the types of industrial chemicals produced by Bayer, and Bayer supplied many of the dyes and photofinishing chemicals that Agfa used in its film products and processes.

The rise of digital imaging technologies prompted the companies to begin to drift apart, however. While Agfa still participates in the consumer and medical film markets, it has also established strong positions in digital imaging segments like graphics and PACS. These businesses have less synergy with Bayer's chemicals, pharmaceuticals, and in vitro diagnostics businesses, according to John Glass, senior vice president of Agfa's Technical Imaging division in Ridgefield Park, NJ.

"We are transitioning quickly from an analog business into a digital business. Bayer is not a software company, and it doesn't understand software," Glass said. "(The spin-off) allows Bayer to reinvest into the areas that it considers more strategic for its core businesses, those being chemicals and pharmaceuticals."

When Agfa does go public, it will probably be in good shape. Agfa has been developing well over the last two years, and this year hit its target of a 6% return on sales, an accomplishment that was achieved a year ahead of the company's restructuring plan to cut costs. Agfa's core business consists of three sectors: prepress, consumer photographic products, and technical products. Of the three, the prepress and technical products units are considered the healthiest.

The technical products business includes Agfa's activities in medical imaging. In x-ray film, Agfa tends to be stronger in the global market than in the U.S., where it has the number-three market share position, behind Eastman Kodak of Rochester, NY, and Sterling Diagnostic Imaging of Greenville, SC.

It is in PACS that Agfa has distinguished itself. The company got an early start in digital image management and is widely viewed as one the top companies in the field. Agfa has numerous large-scale private-sector PACS sites. It was successful in being named one of two vendors in the U.S. military's Digital Imaging Network-Picture Archiving and Communications Systems (DIN-PACS) project (PNN 8/98). Although Agfa's involvement in DIN-PACS to date has resulted in only one PACS sale for the company and its consortium partners, Agfa could reap benefits from DIN-PACS in years to come as the military ramps up its investment in digital imaging technology.

How will the spin-off affect Agfa? Most likely it will be an improvement. Belgium-based Agfa has experienced culture clashes with Bayer throughout their corporate marriage. Bayer also reportedly has not invested as heavily in Agfa has it has in some of its other businesses.

"I think this is very good news for Agfa. It eliminates one more unnecessary set of meddling into their business," said Richard Howell, a former Agfa executive who now runs the Howell Group, a medical technology consulting firm in Gilroy, CA.

An independent Agfa could be more aggressive in making acquisitions and partnerships to add to its film and PACS business, for example. The company might also become more efficient in developing and bringing new technologies to market .

A less positive example of how a divested Agfa could develop comes from Imation of Oakdale, MN. Like Agfa, Imation was spun off from its parent firm, 3M, in an effort to shed less profitable businesses. Imation, however, has struggled with profitability problems since its inception and has implemented a restructuring program to reduce costs. Imation in August finally chose to exit medical imaging by selling its healthcare business to Kodak

There are fundamental differences between Imation and Agfa, however. For one thing, Agfa is more profitable than Imation, turning in operating profits of $283 million in 1997, double that of 1996. Agfa is also twice the size of Imation, with revenues of $4.76 billion last year, compared with Imation's $2.2 billion in sales in the same period. Two of Agfa's major business units-consumer film and healthcare-are larger than similar operations at Imation.

"It's unwise to compare this (divestiture) to Imation," Howell said. "The health and the size of the photographic business of Imation doesn't compare with Agfa. In terms of medical, the amount of business that is at Agfa is also much larger."

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