Adding yet another leg to its rapidly growing medical business, Teleflex Inc. has agreed to acquire Arrow International Inc. for $2 billion in an all-cash transaction.
The July 23 acquisition creates a $1.4 billion company with a deeper and broader medical product line that will account for 45 percent of the parent company's sales and 70 percent of its profit, compared with 33 percent and 56 percent in 2006.
The two global companies are 30 miles apart in central Pennsylvania: Teleflex in Limerick and Arrow in Reading.
Research Triangle Park, N.C.-based Teleflex Medical, which makes disposable products for the anesthesia, respiratory, urology and surgical markets, derives half of its sales from outside the United States. Arrow, a leader in cardiac-care products such as pumps and catheters, gets 42 percent of its $500 million in annual sales from outside the U.S. More than 80 percent of sales will come from disposable products.
``It gives the combined companies a much broader platform in critical-care markets,'' said Frederick Hirt, chief financial officer of Arrow, July 26 by phone. ``The two companies are very, very complementary in product lines and technologies,'' with both of them strong in extruding, molding and thermoforming.
In addition, while Teleflex Medical is strong in Western Europe and China, Arrow is strong in Eastern Europe and the rest of Asia.
``This is a major milestone in our efforts to redefine the Teleflex portfolio,'' said Teleflex Chairman and Chief Executive Officer Jeffrey Black. ``This meets a key, long-standing strategic objective of growing through acquisitions in the medical business. With Arrow, Teleflex will become an established leader in critical-care disposables, a business we like because of its recurring revenue stream.''
The acquisition also meshes with Teleflex's strategy of shifting to higher-margin businesses that are less cyclical, said Black, pointing to the transformation of its aerospace business in the past four years to aftermarket products as opposed to less-profitable original equipment business.
``Our medical segment routinely delivers operating profits in the 20 percent range, which is nearly double that of our aerospace business and nearly three times greater than that of our commercial segment,'' Black said.
The deal - which is expected to be completed in the fourth quarter - creates a medical company with 11,000 employees and more than 25 manufacturing sites in the United States, Mexico, China, Singapore, Malaysia, India and Europe. The companies said the deal is subject to regulatory approval in the U.S. and Europe and approval by Arrow shareholders at an Aug. 31 meeting.
The $45.50 per-share price represents about a 20 percent premium over Arrow's stock price July 20. But Arrow stock rose $6.32 after the deal was announced, to $44.11.
The deal also could end a troubling three months for Arrow. In May, director Richard Niner resigned over the decision to explore the possibility of a sale, and the board fired Chairman and CEO Carl Anderson Jr., who had headed the company since 2003, for missing performance targets.
In Arrow, Teleflex Medical gets a company with strong research and development capabilities and a reputation for being a leader in product development and innovation. In conjunction with the Hershey Medical Center of Penn State University, it developed the first fully implantable heart pump in the U.S. in 2001.
``We intend to apply the research and development at Reading to the combined product portfolio, unlocking new revenue streams and providing significantly competitive differentiation across the board,'' Black said.
Teleflex said that by 2010 it expects to reduce costs annually by $75 million to $80 million as a result of synergies achieved by the merger, and pointed out that it exceeded the cost reductions it projected when it acquired Hudson Respiratory Care in 2004 for $460 million.
Teleflex Medical President Ernest Waaser said most of the savings will be achieved by applying Teleflex's lean manufacturing culture to Arrow operations, the combined purchasing power of the merged companies and use of best practices.
In addition, he said, Teleflex Medical will look at its manufacturing operations.
``Arrow has put a significant amount of investment into their manufacturing operations over the last year or two, and done capacity expansions, which give us the room to prepare for the future,'' Waaser said.
Black insists Teleflex will remain diversified, even though the medical segment has become dominant. Teleflex has announced it will explore ``strategic alternatives'' for some of the businesses in the commercial segment that sell to automotive, marine and industrial markets.
But, Black added that because the company has achieved ``a key strategic goal, we may look to continue to reposition the portfolio and divest, phase out or exit other lower-margin businesses.''