Thermo Fisher To Buy FEI, Boost Electron Microscopy Platform

Thermo Fisher Scientific, Inc. (NYSE:TMO) recently decided to purchase FEI Company (NASDAQ:FEIC) for $4.2 billion. Notably, this buyout will enable Thermo Fisher to access FEI’s industry leading high-performance electron microscopy platform used for protein study, which in turn facilitates life-science research.

Management expects this deal to close by early 2017, subject to the approval of FEI’s shareholders and certain customary closing conditions. Following the closure, Thermo Fisher plans to integrate the FEI business within its Analytical Instruments segment.

We view this FEI deal to be yet another milestone achievement for Thermo Fisher in recent months in terms of expanding its diverse global business, following the completion of the Affymetrix deal (for $1.3 billion) last month.

Details of the Deal

Of late, growing adoption of electron microscopy in high-resolution analysis of protein structure has been observed. FEI’s Cryo-EM technology is one such groundbreaking microscopy solution that complements Thermo Fisher’s mass spectrometry systems used to identify and characterize proteins. The FEI buyout will thus aid Thermo Fisher in driving revenues from its life sciences customers, particularly biopharma; apart from extending its presence in structural biology.

Moreover, FEI’s unique 3D nano-characterization and nano-prototyping imaging technologies are expected to enhance Thermo Fisher’s capabilities in the materials science space. On account of these technologies, FEI enjoys a strong presence in the semiconductor market and its acquisition will now allow Thermo Fisher to generate new growth opportunities for its customers in this space.

Looking ahead, this deal is expected to accelerate Thermo Fisher’s revenues at the Analytical Instruments segment, wherein the company witnessed low single-digit growth last quarter.

Financial Gains

In terms of the financial benefits from the FEI deal, management expects to witness immediate accretion to the company’s earnings. In particular, FEI’s industry-leading services business, spread across more than 20 countries, drives high-margin, recurring revenues, representing approximately 25% of total FEI sales ($930 million in 2015). No doubt, the addition of this services business will benefit Thermo Fisher’s services capabilities as well.

Moreover, the FEI deal is expected to be accretive to Thermo Fisher’s adjusted EPS by 30 cents in the first full year after close. Thermo Fisher also expects to realize total synergies of approximately $80 million by the end of three years following the close, consisting of approximately $55 million of cost synergies and roughly $25 million of adjusted operating income benefits from revenue-related synergies.

Our View

In its May 2016 analyst meeting, Thermo Fisher announced plans to deploy capital worth $17 billion during 2017–2019, of which 70% will be contributed to mergers and acquisitions for business expansion.

So far, apart from boosting revenues, the numerous acquisitions made by Thermo Fisher have benefitted its operating margin, also resulting in tax synergies. We believe the FEI deal, once completed, will be no exception.

Zacks Rank & Key Picks

The company currently holds a Zacks Rank #3 (Hold). Better-ranked medical stocks are Baxter International Inc. (NYSE:BAX) , Boston Scientific Corporation (NYSE:BSX) and SurModics, Inc. (NASDAQ:SRDX) . While Baxter sports a Zacks Rank #1 (Strong Buy), Boston Scientific and SurModics carry a Zacks Rank #2 (Buy).