The Health Care M&A Monthly: Merck KGaA Buys Millipore–

Snatches Life Sciences Firm From Thermo Fisher
Merger Monday, the first day of March, brought us the news that Germany’s Merck KGaA (DE: MRCG) would acquire the American life sciences company Millipore Corp. (NYSE: MIL) for $7.2 billion. While this deal will give MRCG a competitive advantage in the biotech manufacturing and life sciences sectors and will certainly make Millipore shareholders happy, it appears to come with a hefty price tag.
Based in Darmstadt, Germany, Merck is a chemicals and pharmaceuticals company. In 2009, it generated revenue of $10.4 billion and EBIT of  $839.0 million. To diversify away from cyclic products and a dependence on sales from a few high-profile drugs, it staked out a serious position in the biotech market when it bought Serono in 2006 for $13.3 billion.
Headquartered in Billerica, Massachusetts, Millipore provides technologies, tools and services for bioscience research and the biopharma manufacturing industry worldwide. On a trailing 12-month basis, the company generated revenue of $1.65 billion, EBITDA of $408.0 million and net income of $177.0 million. 
Merck is paying $107.00 per share in cash, and assuming Millipore’s net debt, which brings the total purchase price to $7.2 billion. The acquisition is to be funded by cash on hand and a term loan provided by Bank of America Merrill Lynch, BNP Paribas and Commerzbank. As soon as it can do so, Merck plans to replace this bridge loan with a bond issue.
From a strategic perspective, this acquisition gives Merck significant scale in the high-growth bioresearch and bioproduction industries. Through anticipated synergies, it also allows the company to tap additional potential in its chemicals business. And it serves to diversify the company’s source of revenues away from reliance on its pharmaceutical products, including the multiple sclerosis drug Rebif and the cancer drug Erbitux.
Whether this deal makes financial sense is another question, and to answer it, we need to delve into its backstory. Merck’s bid effectively trumps a prior, unsolicited $6.0 billion approach made in mid-February by life sciences giant Thermo Fisher Scientific (NYSE: TMO). Millipore took Thermo Fisher’s approach seriously enough to hire investment banker Goldman Sachs to help the company sort out its strategic alternatives, including a merger or outright sale. When the details were penciled out, TMO’s offer valued MIL at about $92.00 per share. That in turn prompted one trigger-happy law firm to mount a preemptive strike against the proposal on the grounds that it didn’t offer MIL shareholders enough. What were those grounds exactly? The law firm noted that at least one analyst believed Millipore to have an unlocked value of $115.00 per share.
The Thermo Fisher approach offered Millipore shareholders a premium of approximately 31% at the time, but the market response to the rumor did not exactly favor either TMO’s offer or the analyst’s lofty assessment. Since news of TMO’s approach first appeared in the press, MIL’s price has risen to just above $94.00 per share, $2.00 better than TMO’s bid but still short of the exalted price of $115.00 per share. It was in this context that Goldman Sachs set to work testing the waters to see whether another suitor would pay a higher price. And they found a willing buyer in Merck. At $107.00 per share, Merck’s bid offers Millipore shareholders a 13% premium to its prior-day price and a 53% premium to its price before the Thermo Fisher rumors. No doubt Goldman urged this higher price, not just because of the higher fees it would bring in, but because it was calculated to dissuade TMO or any other suitor from mounting an even higher counter-bid.
An acquisition multiples perspective provides a reality check between the two offers. Thermo Fisher’s bid yields ratios of 3.6x revenue and 14.7x EBITDA while Merck’s yields 4.36x revenue and 41.0x EBITDA. These latter multiples definitely fall at the high end of the range for life sciences companies. After all, the merger between Fisher Scientific and Thermo Electron that resulted in TMO during the sky’s-the-limit market of 2006 commanded a price to revenue multiple of just 2.3x and a price to EBITDA multiple of 13.7x. While it is expensive, the current transaction is in several respects a one-off deal, and not a general indicator of an over-heating M&A market. At least, that’s what we are hoping.