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Stock Analysis, IPO, Mutual Funds, Bonds & More

SHL-Siemens share-swap ratio offers a fair deal

The merger of Siemens Healthcare Diagnostics (SHL) with Siemens is a logical extension of the ongoing business restructuring within Siemens Group and will provide synergies to the merged entity.

, ET Bureau|
Dec 02, 2009, 01.30 AM IST
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The merger of Siemens Healthcare Diagnostics (SHL) with Siemens is a logical extension of the ongoing business restructuring within Siemens Group and will provide synergies to the merged entity. While the share swap ratio may not appear as rewarding to SHL shareholders based on the current price, it’s a much better deal for them, based on the six-month average price.

Siemens has been engaged in the process of business restructuring over the past few years with various mergers, divestments and so on. Among these are the transfer of its 100% stake in its subsidiary Siemens Information Systems, to a subsidiary of Siemens AG, acquisition of the balance 26% stake in Siemens Industrial Turbomachinery Services, and merger of Siemens VDO Automotive.

The company itself has been operating in more than eight different business segments, and comprises 19 legal entities in the country, which may not all be adding value to it. There is still scope for the company to undertake more such initiatives, and with the economy gathering steam; it won’t be surprising if it announces more such moves.

A significant part of synergies from the merger would come from lower marketing, administrative and other overhead expenses. This will also enable the combined entity to push volumes for the combined product portfolio through better integration of all the support functions such as logistics, supply chain, and so on.

SHL is in the business of manufacturing chemical test systems and medical diagnostic equipment’s. Siemens has a diversified portfolio, including a healthcare division, which provides medical equipment for diagnostic, treatment and aftercare. In terms of size, SHL is quite small with sales of Rs 165 crore for year ending September 2009 (both companies follow Oct-Sept financial year), which is an impressive growth of 65% over the previous year. However, excluding the extraordinary items, profits remain nearly the same at Rs 5.3 crore.

In comparison, Siemens Healthcare division reported sales of Rs 543 crore, a decline of 10%. However, profits (before interest and taxes) improved to Rs 41.3 crore, an increase of 23%.

The swap ratio of 1:2 (each share of SHL of face value of Rs 10, to receive 2 share of Siemens of face value of Rs 2) looks unfair to SHL at the current price. However, the stock price of SHL has run up sharply, gaining nearly 80% in the past six months, probably in anticipation of the merger, against a 15% gain for Siemens.

The six-month average price of the two companies gives a fair ratio of 1:1.7, which makes it a good deal for SHL at the proposed ratio. There is also nothing for Siemens to lose, as considering the size involved, the impact on its balance sheet will be very small.
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