STOCK WATCH


Thermo Electron and Fisher Scientific: Science Giants

Two of the biggest providers of laboratory equipment plan to merge. What does the deal mean for investors?



Thermo Electron (symbol TMO) and Fisher Scientific International (FSH) have for years been two of the biggest providers of laboratory scientific equipment -- from test tubes and beakers to highly sophisticated mass spectrometry instruments. The two firms are neighbors; Thermo in Waltham, Mass., and Fisher in Hampton, N.H. And both have been serial acquirers, buying up smaller competitors. Now, the boards of the two companies have proposed merging. "It's the marriage of the giants," says Peter McDonald, an analyst with American Technology Research.

The new company, Thermo Fisher Scientific, will be the largest provider of laboratory products and services in the life, laboratory and health sciences area. Under the all-stock deal, two shares of Thermo would be issued for each share of Fisher. Even though Fisher has the larger market cap, Thermo is the acquiring firm. Thermo's CEO, Marijn Deckers, will be CEO of the combined firm. The deal is expected to clear regulatory hurdles easily.

Wall Street on Monday reacted to the deal cautiously. Fisher rose 3%, to $75.95, but that's 4% below the proposed merger price. Thermo fell more than 2%, to $38.54. Some Fisher shareholders were disappointed by the skimpy deal premium. And some Thermo traders fretted that Thermo's edge in high-end scientific gear could get lost in the larger company.

But the deal offers synergies that Wall Street wants in deals -- and often doesn't get. Thermo has terrific equipment; Fisher has a much better distribution network. Indeed, Thermo often sells equipment through Fisher. "Overall it's a good deal," says American Technology Research's McDonald. "There's a nice fit between the two companies." Deutsche Bank Securities calls the deal "a beautiful marriage."

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At the same time, neither of these two stocks was a screaming bargain before the deal. According to Thomson First Call, analysts, on average, expected Thermo to earn $1.72 a share this year and $1.96 next year -- giving Thermo a price-earnings ratio of 22 on 2006 estimates and 20 on 2007 estimates. Meanwhile, Fisher trades at 20 times 2006 estimates of $3.84 per share and 17 times 2007 estimates of $4.45. Each company's earnings are expected to grow about 10% to 15% annually. "Thermo is fairly valued," says McDonald, who covered that stock and would cover the merged firm if the deal was consummated.

The bottom line: Two fine companies and a good merger. But you'll probably want to wait for the stock prices to fall or earnings growth to accelerate before buying.

--Steven Goldberg




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