Merck KGaA Market Cap (as of 06/12/13): €27.84bn
AZ Electronic Materials SA Market Cap (as of 06/12/13): €1.79bn

On December 5, 2013 the Darmstadt-based German drug and chemicals company, Merck KGaA, announced an agreement with the Board of Directors of AZ Electronic Materials SA (AZ) regarding a recommended $2.57bn all-cash offer for the entire share capital of the Luxembourg-based specialty chemicals manufacturer.
Merck is a leading global pharmaceutical, chemical and life science company with approximately 38,000 employees spanning across 66 countries and total revenue of $15.3bn in 2012. Merck’s operating activities come under the umbrella of Merck KGaA, in which the Merck family holds about 70% interest and public shareholders own the remainder of approximately 30% of the shares. The company is aiming to further expand its materials and specialty chemicals business by acquiring a global leader in supplying high-tech materials for the electronics industry, AZ Electronic Materials SA.
Through its high-quality, high-purity specialty chemical materials, AZ in 2012 generated revenues of $794 million and EBITDA of $262 million. The company’s IC Materials division, which produces process chemicals for the production of integrated circuits used in electronic devices such as computers, smart-phones, iPads and games consoles, accounted for 68% of last year’s revenue. The divisional EBITDA margin was 41% in 2012. The Optronics division, which produces light-sensitive “photoresists” materials used for the production of flat panel displays, accounted for about 30% of total 2012 revenue, with an EBITDA margin of 29%. AZ had around 1,100 employees at the end of 2012, with nearly 60% of these located in Asia.
According to the terms of the offer, investors in the London-listed AZ Electronic Materials – one of whose customers is the electronics giant Apple Inc. – will receive 403.5GBp per share in cash, valuing AZ at around £1.6bn or the equivalent of $2.57bn. The offer represents a premium of 41% over the 3-month volume-weighted average share price of AZ and a 53% premium to the 263GBp closing price on December 4, 2013. Merck is offering a multiple of 10.7x EBITDA, which compares with an average multiple of 9.49x EBITDA for specialty chemicals deals over the last five years. The acquisition will be fully financed, including the coverage of some $328 million of debt, through Merck’s existing cash reserves.
One of the drivers of the acquisition is the unsuccessfulness of Merck’s €1bn a year investment in R&D. In fact, in the last 20 years the company has not developed or discovered any new drugs or brought innovation to the market. The pharmaceutical side, which represents 55% of the company’s revenue, seems to be uncompetitive. The deal, on the contrary, would create higher value for both R&D teams; Merck hopes to develop innovative solutions for customers in the electronics industry, while generating annualized synergies of $34.2 million through the rationalization of overlapping corporate and administrative functions by 2016. Merck is estimating the integration costs of the transaction to be around $68.3 million, spread over the years 2014 to 2016.
As said in a previous report (, the increasing competition, healthcare reforms and Government’s cost containment measures have forced the pharma companies to move towards higher profit sectors like rare disease treatments and high-tech products. Therefore, the main purpose of the deal is the diversification of Merck’s business. Indeed, by combining the two companies, Merck is able to rebalance its portfolio and increase the weight of high-margin performance material sales on the total revenue: from 16% to 25%. Furthermore, the transaction would represent a great opportunity for Merck to gain more market share in the electronics industry, characterized by an increasing demand.
The day after the deal’s announcement, Merck’s price decreased by 1.7%, while AZ’s market price remained quite stable at around 394GBp.
Bank of America Merill Lynch is the exclusive financial adviser to Merck KGaA, while Rotschild is acting as AZ Electronic’s lead financial adviser. Goldman Sachs International and UBS Limited are acting as joint corporate brokers and joint financial advisers to AZ in respect to the offer. The successful completion of the transaction is conditional upon antitrust clearance as well as a minimum acceptance level of 95% of the share capital.