ESC Acquires Coherent’s Medical Group

Stephanie A. Weiss

ESC Medical Systems Ltd. has agreed to buy the Coherent Inc. Medical Group for cash, stock and notes valued around $203 million plus payments of up to $25 million based on growth of ophthalmic laser systems.

Coherent's Santa Clara, Calif.-based Medical Group, with about $55 million in net tangible assets, reported about $206 million in sales for fiscal 2000. ESC reported about $154 million in sales.

The acquisition will double ESC's installed base of light-based medical products and add a new market --ophthalmology -- to its aesthetic, surgical and service portfolio. It also inspired company officials to propose a new corporate name, Lumenis, to better reflect its concentration on light-based technology.

Coherent's chief financial officer, Robert Quillinan, said the company studied the medical marketplace for a few years before concluding that industry consolidation was impending.

"Either we had to be a consolidator, or somebody else had to be a consolidator," Quillinan said. "The combined company has a better chance of being successful than either of us on a stand-alone basis. Instead of owning 100 percent of something that is very difficult, we now own 16 percent."

CEO Yacha Sutton of ESC said the company does not expect antitrust regulators to require any divestitures because the acquisition combines complementary, rather than competing, companies. Although their aesthetic (hair removal and skin resurfacing) technologies were similar, each company focused on a different marketplace, with Coherent in the US and ESC elsewhere. In surgical technology, Coherent focused on urology and ESC on ear-nose-throat applications.

ESC Chief Financial Officer Sagi Genger predicted that the combined company will see 30 percent growth in earnings per share by 2002.

"Clearly, it's a bit difficult [to estimate], considering we've just bought this thing and haven't taken it out for a spin yet," he said.

Sutton said some of the increase will come from cost savings in combining the operations:

Both companies have been spending about 33 percent of their revenues ($120 million) on selling and marketing, such as trade shows. There's a lot of room for savings in that category, Sutton said.
Some of Coherent's research and development is redundant to ESC's. "The combined R&D budgets, after eliminating $3 million of savings, will be approximately $27 million, and that would allow us to generate a significant pipeline going forward," he said.

In addition, Genger said, "Coherent Medical will now also be receiving the senior management attention that it may need and [that] might have been somewhat lacking in an environment in which they were more of a telecommunications-oriented company."

Under the agreement, ESC will give Coherent $100 million in cash, $12.9 million in promissory notes and 5,432,099 shares of common stock. ESC agreed to additional payments based on the ophthalmic unit's performance:

If ESC owns the unit in 2004, it will pay Coherent 21 cents per dollar of cumulative revenue over $450 million, up to $25 million. (Genger said the unit produced about $80 million in revenue, including service, in fiscal 2000.)
If ESC sells the unit before 2004, it will give Coherent 50 cents per net dollar over $10 million, to a maximum of $25 million.

Jim Taylor, president of Coherent's Medical Group, and Robert Grove, president of Coherent Star, will hold leadership positions in the combined company. Coherent CEO Bernard Couillaud will also join ESC's board of directors.

Quillinan said Coherent plans to use the proceeds to increase its other business segments, but officials have no specific plans yet. He said the Medical Group was a significant internal customer for the Photonics Group, and a supply agreement with Lumenis will continue that relationship. He noted that the Photonics Group has had other medical customers, and he expects those relationships to continue.

Quillinan added that ESC has not been a significant Coherent customer, but he would not comment on whether the acquisition would change that situation.