April 27 (Bloomberg) -- Siemens AG, Europe's largest engineering company, agreed to acquire Diagnostic Products Corp. for about $1.86 billion in cash to bolster its medical division, the manufacturer's most profitable unit.
Siemens offers $58.50 for each share of Los Angeles-based Diagnostic Products, which makes test kits to detect diseases such as cancer and allergies, the Munich-based company said in a statement today. The company today also said net income in the three months ended in March rose 14 percent.
The acquisition marks the second and largest medical purchase in Chief Executive Officer Klaus Kleinfeld's 15 months in office. Kleinfeld, who is expanding the most profitable divisions while scaling back those units that lag profit goals, today said the company will cut more than the 7,000 jobs already announced.
``It makes sense that they're growing the medical unit with acquisitions,'' said Frank Rothauge, an analyst at Sal. Oppenheim Jr. & Cie. in Frankfurt, who rates the shares ``neural.'' ``The earnings don't yet reflect a meaningful shift from what we saw in the preceding quarter.''
Siemens today also reported the first profit increase since Kleinfeld became CEO. Fiscal second-quarter net income rose to 887 million euros ($1.1 billion), or 95 cents a share. Sales from continued operations rose 21 percent to 21.5 billion euros.
Medical Focus
Siemens, General Electric Co. and Royal Philips Electronics NV are increasing their presence in the medical-equipment field as aging populations have spurred sales of devices diagnosing and treating conditions such as cardiac arrests and cancer.
Shares of Siemens declined as much as 2.55 euros, or 3.2 percent, to 77.22 euros and traded at 77.40 euros as of 10:47 a.m. in Frankfurt. Siemens today forecast sales and new orders will ``even out somewhat'' in the second half of the year.
The company last year spent $967 million on CTI Molecular Imaging Inc., buying a company it had been working with since 1987 through a venture for equipment that helps doctors detect diseases such as cancer or cardiac diseases. The unit's other products include hearing aids and respiratory equipment.
In the last quarter, medical gear at Siemens had sales of 2.05 billion euros, accounting for 9.5 percent of total revenue at the company. With operating earnings of 258 million euros the division generated about a fifth of overall earnings.
Offer Premium
Siemens's offer for DPC is 21 percent above yesterday's closing price. Diagnostic Products was advised by Lehman Brothers Holdings Inc. in the transaction and Siemens was advised by JPMorgan Chase & Co.
DPC had 2005 sales of $481 million and an operating profit of $96 million. The price Siemens agreed to pay is ``adequate'' for the industry, Chief Financial Officer Heinz-Joachim Neubuerger said in an interview. Neubuerger is stepping down next month.
Amsterdam-based Philips spent about $1.2 billion on three medical acquisitions since July of last year.
The extra yield, or spread, investors demand to buy Siemens 5.75 percent 2 billion-euro bonds due in 2011 instead of government debt was unchanged at 24 basis points as of 9:29 a.m. in London, according to RBC Capital Markets Ltd.
Margin Goals
Siemens is halfway through a two-year program to bring the 11 main units within set profitability targets. To reach the goals by April 2007 at the latest, Kleinfeld has slashed about 7,000 jobs, dissolved or given away unprofitable units and made acquisitions. In the six months ended in March, 1,500 people at the communications unit lost their job.
``We will continue to focus all our efforts on achieving our 2007 targets,'' Kleinfeld said in the statement. The company plans to cut more jobs at its technology divisions ``in the short term.''
The communications division, Siemens's largest by sales and employees, had an operating profit of 27 million euros on sales of 3.38 billion euros in the period.
The SBS computer-services unit, where the company is eliminating about 5,400 jobs worldwide, lost 194 million euros in the quarter as sales severance pay increased to 155 million euros. Kleinfeld today said there'll be more costs to turn around the businesses in the second half of the fiscal year.
Industry Standards
``There's growing concern that this revamp will turn into a never-ending story,'' said Falk Reimann, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, who advises investors sell Siemens shares.
Kleinfeld, who became Siemens's first new CEO in 12 years in January of last year, has said the targets he's set for the divisions are standard in the industries where the businesses operate. His predecessor, Heinrich von Pierer, originally set the targets in 2000, and failed to reach all of them. Von Pierer now heads the supervisory board.
Siemens, whose products range from power plants to trains to phone networking gear, last year generated sales of about $96 billion, similar to the gross domestic product of the Philippines. Siemens employs about 470,000 people worldwide.
The company had been expected to report net income of 825 million euros on sales of 20.7 billion euros, according to the median forecast of 11 analyst surveyed by Bloomberg. Today marked the first time in three quarters that Siemens surpassed analyst estimates.
