Splitsville for Agilent

SANTA CLARA, Calif.—So, a little less than sixmonths ago, ISI Group analyst Ross Muken was apparently staring at just theright spot in his crystal ball when he said he thought Agilent Technologiesshould consider divesting some of its underperforming assets—specificallysaying that it should explore a split of its electronic measurement businessand life-science business.

Now, mid-September brings news from Agilent thatit will separate into two publicly traded companies: one in life sciences,diagnostics and applied markets (LDA) that will retain the Agilent name, with total2013 revenues of some $3.9 billion, and the other that will consist of Agilent'scurrent portfolio of electronic measurement (EM) products, which boasts $2.9million in estimated 2013 revenues and will receive a new moniker later. Theseparation is expected to occur through a tax-free pro rata spinoff of the EM company to Agilent shareholders.

"Agilent has evolved into two distinct investmentand business opportunities, and we are creating two separate and strategicallyfocused enterprises to allow each to maximize its growth and success," saidWilliam Sullivan, Agilent's president and CEO. "Agilent's history is one ofreinvention, starting with our own separation from HP and including four majorspinoffs since 2005. We are once again making a bold move, as we have done manytimes in the past, to ensure a future of sustainable growth for both the LDAand EM companies."

The benefits for Agilent begin with the belief thatthe separation will result in greater management focus on the distinct businessesof LDA and EM, with the ability for the LDA company to devote resources to thehigher-growth LDA business and reduce exposure to the more cyclical EM industry.In a similar vein, the EM company will be able to devote resources to its owngrowth that were previously used to capitalize LDA.

Agilent cited having "two independent and uniqueinvestment profiles" as another benefit, along with the observation that bothcompanies "will be well capitalized, having strong balance sheets andinvestment-grade profiles with target debt-to-EBITDA ratios below 2.0x."

The Agilent board of directors granted initialapproval to pursue the separation plan at its meeting on Sept. 18. Under theplan, Agilent shareholders will receive a prorata distribution of shares in the new EM company via a tax-free spinoff.Although Agilent admits it cannot guarantee the separation will be completedwithin a certain time frame, the transaction is expected to be completed by the endof calendar year 2014, subject to the satisfaction of closing conditions. The keysuch conditions would be obtaining final approval from the Agilent board ofdirectors, satisfactory completion of financing, receipt of tax opinions,receipt of favorable rulings from the Internal Revenue Service, theeffectiveness of a Form 10 filing with the Securities and Exchange Commissionand satisfying foreign regulatory requirements.

Bill Sullivan remains president and CEO of Agilentand Didier Hirsch continues as chief financial officer (CFO). Ron Nersesian,who has been Agilent's president and chief operating officer, is executive vicepresident of Agilent and president and CEO-designate of the new EM company,effective immediately. Neil Dougherty, who has been Agilent's vice presidentand treasurer, is vice president of Agilent and CFO-designate of the new EMcompany.

"The board and I believe Ron is the right leaderfor the new company," said Sullivan. "He has an excellent track record ofrunning this business, and he has the vision and expertise to position the newcompany for accelerated growth and success."

Right on the heels of the announced split of thecompany, Agilent also noted that it has combined its Life Sciences Group withits Diagnostics and Genomics business and named Lars Holmkvist the new group'spresident and senior vice president of Agilent, effective immediately.Holmkvist was previously president of the Diagnostics and Genomics Group andsenior vice president of Agilent.

Agilent, the life sciences, diagnostics andapplied markets half of the splitting company, will consist of twobusinesses: the Chemical Analysis Group, led by Mike McMullen, current grouppresident and Agilent senior vice president, and the new Life Sciences andDiagnostics Group, with Holmkvist as its president. Nick Roelofs, who has beenpresident of the Life Sciences Group, will leave Agilent to pursue otherbusiness opportunities.

"We are creating a new Agilent with a simplifiedstructure that can move quickly to develop and deliver industry-leading totalworkflow solutions for our customers," said Sullivan. "Lars is the ideal leaderfor the new group with his years of experience, depth of market knowledge andsuperb leadership style."

On the news of the Agilent splitting plan, Bairdraised its price target on Agilent from $52 to $55, with the firm expressingits belief that such a move will mean cleaner investments and different growthprofiles that will be more focused and on which value can be determined moreeasily.

Jefferies & Co. analyst Brandon Couillard noted thatAgilent's decision to spin off its EM business "reflects a welcome departurefrom its status quo position and acknowledgement that the cyclicality of its electronicsunit has impaired a more rationale appraisal of its inherent value amongsthealthcare investors."

ISI analyst Muken, who had been one of the earlypeople rooting for a split, wrote in a research note about the Sept. 19 newsthat, "By splitting the business, we believe Agilent will achievesignificant multiple expansion as investors can more effectively analyze growthdrivers, identify the correct comparables, and properly value the businessunits." Analysts at ISI and Janney Montgomery Scott were both quick to upgradeAgilent's stock on the news. To be honest, Wall Street in general seemed happyabout the whole affair, as Agilent's stock hit its highest point in more thantwo years.

As some market-watchers have pointed out,splitting the business won't be an entirely clean affair, as the roughly250-person R&D department serves both sides of Agilent's business and maynot be easy to divvy up. During a conference call with analysts, Sullivan didsay, "We are dividing the corporate labs to correspond to the two businesses,driving technologies into revenue more quickly."