Philips to buy image-guided therapy company Volcano for $1.2 billion

Philips announced Wednesday a definitive merger agreement to acquire Volcano for $18.00 per share in cash, or a total of approximately $1.2 billion including cash and $200 million of debt, boosting its position in the image-guided therapy market. The transaction, which has been unanimously approved by Volcano's board, is expected to close in the first quarter of 2015.

"The agreement to acquire Volcano significantly advances our strategy to become the leading systems integrator in image-guided therapies," remarked Philips CEO Frans van Houten, adding that "Volcano's...product portfolio is highly complementary to our strong offering in live image-guidance solutions, creating an opportunity to accelerate the revenue growth for our image-guided therapy business to a high single-digit rate by 2017."

The executive noted "we had been on the look-out for this company. In the summer there was heightened interest by competitors so we decided to engage." Van Houten called the price, which represents a 57-percent premium to Volcano's closing share price on December 16, "very acceptable," adding that "minimally invasive surgery is the way forward."

According to Philips, Volcano generated 2013 sales of around $400 million and has "the broadest product portfolio" in intravascular ultrasound imaging and fractional flow reserve measurement technologies, along with a "peripheral vascular therapeutics business that targets a segment with a double-digit growth rate." Under the deal, Volcano will become part of Philips' new image-guided therapy business group, which will be led by Philips executive Bert van Meurs.

Philips noted that the merger will provide higher growth, "additional operating leverage" with increased productive sales operations, and improve "opportunities in new, adjacent segments." By 2017, the transaction is expected to be accretive to Philips' reported earnings per share, with around a 20 percent increase in margins from its image-guided therapy business group. "Our combined sales forces will be able to capture immediate cross selling opportunities, while our joint R&D teams will be able to develop new solutions to address significant unmet needs in the minimally invasive treatment of cardiovascular diseases," van Houten said.

Commenting on the news, Kepler Cheuvreux analyst Peter Olofsen said that "while this transaction will bolster Philips’s presence in image-guided therapy, a segment with above-average growth and margin potential, it comes at a high price." The analyst added that the price tag implies "lofty multiples," with an enterprise value to sales ratio of three times and 32 times for earnings. Rabobank analyst Hans Slob agreed that "Philips is doing a rather expensive acquisition," but noted the deal made strategic sense in the long term.

In September, activist investor Engaged Capital, which owns around 5.1 percent of Volcano, urged the device maker to evaluate its strategic alternatives and search for a new CEO in light of a 50-percent decline in the device maker's stock this year. In the same month, Philips revealed plans to sharpen its focus on healthcare and consumer products by creating a single HealthTech division, while moving its lighting unit into a separate legal structure.