Plucking up Courage, Beckman Buys Coulter

Most people thought that the eventual acquirer for Coulter, which had been actively seeking a buyer recently--would be Johnson & Johnson or Roche. That it proved to be Beckman was something of a surprise. Beckman hopes that the combined companies will give it greater leverage with larger buyers and those seeking a broader array of tests from one supplier.

Beckman Instrument Inc.'s announcement early this month that it would buy Coulter Corp.[See Deal] and the reportedly disappointing performance of J&J’s diagnostics division), no one at all. But few suspected that the fiscally and managerially conservative Beckman would have the guts to take on an acquisition of such magnitude.

In paying $875 million in cash for Coulter (plus assuming $175 million of Coulter's debt), Beckman is almost doubling its size. The combined Beckman Coulter Inc. , will have $1.7 billion in sales, $700 million from Coulter and $1.03 billion from Beckman, giving it the critical mass and breadth of product line that is so important in today's rapidly consolidating diagnostics scenario. Such breadth and size were lacking at the separate companies which each got more than half of revenues from one diagnostic segment. Beckman is one of the top two or three suppliers of clinical chemistry systems, while Coulter is the world market leader in hematology.

Coulter has several main attractions for Beckman, Louis Rosso, Beckman's chairman and CEO, told analysts in a conference call following the announcement of its plans. These should help its standing with buying groups and managed care organizations, traditionally weak sources of sales for Beckman. The companies have universal recognition in laboratories and strong franchises for decades. Together, they have 75,000 instruments in operation worldwide and most hospitals own something from one or the other, he said. Beckman is number two in installed clinical chemistry bases worldwide. Coulter is number one in hematology revenues, with 40% market share, twice that of its nearest competitor. Rosso noted that the merged company will be able to supply labs with more than 75% of routine laboratory tests; Beckman's recent acquisition of Sanofi Diagnostics Pasteur 's automated immunoassay business [See Deal] also gives it a presence in the largest diagnostics segment. Moreover, the trend in some hospitals is to combine hematology and clinical chemistry laboratories into one group called chematology, says Rosso.

Also, Rosso noted, both companies have strong efforts in laboratory automation. Beckman's robotics system and Coulter's strategic alliance with IDS to sell a large, multi-million dollar sample tracking system, will help customers move gradually to total automation. Coulter, in addition, has significant research efforts in some attractive emerging areas like flow cytometry, used in cell characterization and analysis. Flow cytometry products are sold largely to researchers, an important customer base for Beckman.

Beckman believes it can help Coulter better optimize its bottom line. Coulter's operating margins are less than half those of Beckman's, a weakness Rosso attributes to Coulter's higher administrative and R&D expenses and the way in which Coulter handles its equipment leasing. As a private company, Coulter wasn't accountable to anyone, but Beckman has expertise at imposing fiscal restraint, Rosso contends.

But Beckman is also assuming $700 million in bank debt to pay for the acquisition, giving it a risky debt-to-equity ratio of 95:5, according to Robert Dunne, an analyst at Wasserstein Parella. Its earnings dilution will be huge—$1-2 per share in 1997 and 1998 and, in addition, a one-time charge this year of $10 a share to cover the purchase. Beck-man Coulter will be a leader in two large segments of diagnostics, hematology and chemistry, but neither is growing and both face tremendous pricing pressure. Rosso himself projects growth in the high single digits for years to come, leading some analysts to wonder if the new company will have the cash flow to pay down its debt in a timely fashion. Beckman plans to sell real estate to help finance the acquisition but even that isn't likely to suffice, says Dunne.

There are other concerns. Rosso hopes to leverage the recognition of the franchise of both names to garner sales, particularly to managed care accounts. But how important is brand name loyalty in a world dominated by managed care? Beckman hasn't had a lot of luck in the US with managed care, and while Coulter has been more successful, it has a reputation of compromising profitability to win sales, a discounting practice Beckman isn't likely to continue.

Beckman has financially astute management but it lacks experience with major acquisitions. Indeed, until this month, even as it came under fire for its lack of product breadth, its management seemed unwilling to make large-scale efforts to diversify. It has made a series of small purchases in recent years, most notably buying Hybritech Inc. from Eli Lilly & Co. [See Deal], and more recently, the Sanofi immunassay business, but these deals are hardly in the same league as acquiring Coulter.

Rosso downplays these concerns, noting that the company's plan is to return to investment-grade rating by 1999. Beckman's large installed base of instruments generates revenues which give it excellent cash flow going forward, he asserts. And Beckman has a good grasp of Coulter's weaknesses and strengths. Certainly this should come in handy as the new company battles other newly merged entities like Roche-Boehringer and Dade Behring Inc. [See Deal]. The deal also raises an interesting question for competitors: with the premier hematology property sewed up, what will those large companies striving for breadth but lacking hematology do to close the gap?

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