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Hitt og þetta 30. júní 2006

DJ THE SKEPTIC: Siemens Pays Up For Growth

LONDON (Dow Jones)--Buying a future growth stream can be quite expensive, but it's often necessary if a company wants to evolve - and Siemens' purchase of Bayer's medical diagnostics business is one of those deals.

At a purchase price of EUR4.2 billion, Siemens is paying nearly 30X EBIT and nearly 3X sales for the asset - which looks pricey compared with General Electric's 2003 purchase of Amersham for 21X EBIT.

But then, the medical instruments industry has changed a bit in the last three years.

The main players - GE, Philips and Siemens - have preferred to buy existing businesses and research rather than build on their own. This has raised recent purchase valuations. For instance, Philips also ended up paying over 3X sales for Intermagnetics.

For Siemens, the latest acquisition tracks a strategy that looks similar to what Jeffery Immelt has been doing at GE since he took over from Jack Welch five years ago: not just getting out of stodgy, low margin businesses but also expediting entry into high margin, high tech areas that will be in demand going forward.

Siemens isn't buying the slower growth diabetes care business, which is good. Nor is it buying Bayer's contrast agent unit. This means Siemens' integration with its CTI and DPC units will be easier.

The challenge will be to build up momentum on combining Bayer's businesses with DPC - with a joint acquisition value of EUR5.7 billion - to ensure more revenue synergies.

Siemens' weighted average cost of capital is 7.5%, and it says its ROIC will just about beat that next year and will be earnings accretive by wider margins thereafter.

Siemens' big bet is that various laboratories in North America and Europe will continue to automate their information databases and hospitals will invest money in making that information readily available to physicians.

But Siemens will face tough competition in this space, from Roche and Abbott.

For investors the real story is that this deal will contribute to bridging Siemens' longstanding conglomerate discount.

In the last three years Siemens' share price has had mixed fortunes compared with the rest of the German market. It was outperforming the DAX 30 until mid-2005, when weaker-than-expected margins in some of its businesses disappointed investors. Since then it has underperformed the market.

But with Siemens hiving off its low-margin networking equipment business in a JV with Nokia last week and then buying Bayer's business, it should be able to close some of the gap.

Siemens' track record in selling off businesses without impairments has been good. But its acquisitions have been mixed. The company spent nearly a billion dollars buying Austrian firm VA Tech in 2004, a unit that came with its share of headaches, forcing the German group to take some writedown hits.

Bayer's business - which boasts of about 20% EBITDA margins - may pose challenges of a different kind, the main being getting the right pricing model to retain the long-term attention of clients. It may even have to consider discounting some of the IT tools that go with its products.

But even so Siemens' investors should feel enthusiastic about this transaction, as the growth potential is there and future value can be had from R&D. in short, it could be a turning point.