Siemens Healthineers’ acquisition of Varian Medical Systems for $16.4bn

Introduction: 

On August 2nd, Siemens Healthineers announced a definitive agreement to acquire all shares of Varian Medical Systems for $177.5 per share, which corresponds to a purchase price of approximately $16.4bn in cash. This transaction builds on the long-standing collaboration between Siemens Healthineers and Varian to develop improved cancer therapy solutions. Since 2012, they have been working together successfully in their strategic “EnVision” partnership to shape the future of cancer treatment, combining Varian’s innovative therapeutic systems and Siemens Healthineers leading imaging technology. The deal will create a global leader in healthcare with a comprehensive portfolio to fight cancer – from imaging for treatment planning to focused radiation therapy.  

Companies’ Overview: 

Varian:  

Founded in 1948 and based in Palo Alto (California), Varian is a world leader in the field of cancer care, with innovative solutions especially in radiation oncology and related software. Being at the forefront of innovation for more than 70 years, the company is increasingly leveraging technologies to develop and deliver multidisciplinary, integrated cancer treatment. 

Varian operates in three main segments:  

  • Oncology Systems 

It designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiotherapy and advanced treatments.  

  • Proton Solutions 

It is focused on delivering proton therapy, another form of external beam radiotherapy which might be preferred for treating certain cancers, particularly tumors near critical structures. 

  • Interventional Solutions  

It offers products for interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolic particles.  

In terms of performance, the company reported total revenues of $3,168 million in FY 2020, 2% lower than the previous year. This was mainly due to the decline in hardware product revenues from Oncology Systems due to customer capital constraints and site access challenges, resulting from Covid-19. The Operating Income in FY 2020 was $323 million, which implies an operating margin of 10.2%, down from approximately 12% in 2019.  The company is listed on the New York Stock Exchange (NYSE). The current share price is moving around the level announced in the acquisition agreement on August 2nd, 2020 ($175), which implies a market cap of approximately $16bn. 

Siemens Healthineers:  

Founded in 2017 and based in Erlangen, Siemens Healthineers AG is a German multinational company operating in the medical equipment and devices industry. It operates in more than 70 countries worldwide and comprises 54,300 employees.  

Siemens focuses on three business segments:  

  • Imaging 

It produces medical imaging products, services and solutions which are all based on shared software platforms. 

  • Diagnostics  

It provides laboratory diagnostics services and products and point-of-care testing. 

  • Advanced Therapies 

It comprises a series of integrated and marginally invasive products and services within different fields such as oncology and cardiology. 

In a recent interview with the online newsletter Examining Healthcare, Siemens Healthineers AG CEO Bernd Montag stresses the importance of the process of digitization in the healthcare industry, which provides insight as to the company’s future direction. 

During the 2020 fiscal year, Siemens Healthineers AG produced total revenues of €14,460 million. The Advanced Therapies and the Imaging segments have grown, while a slight decline has been reported for Diagnostics. The adjusted EBIT of €2,230 decreased by 10%; the year-over-year decline is mainly ascribable to the performance of the Diagnostics segments and the negative spillovers of the COVID-19 pandemic. Net income was 10% lower than the previous fiscal year amounting to €1,423 million. Siemens is listed on the stock exchanges of Frankfurt, Main and Xetra with a market capitalization of €42.774bn. 

Industry Overview: 

The healthcare sector is among the world’s largest and fastest-growing industries and has been one the most resilient to the current pandemic. Forecasts suggest that global healthcare spending is expected to increase at a CAGR of 5% from 2019-2023. The industry is characterized by high barriers to entry, high margins and counter-cyclical revenues. Moreover, the sector benefits from several trends and growth drivers including an increasingly ageing population, rising prevalence of chronic diseases, technological advancements and the expansion of health-care systems in emerging markets. Indeed, providing healthcare to the growing ageing population is currently among the key concerns for governments as life expectancy has significantly increased reaching an average of 74.7 years. In this perspective, spending on the global geriatric market is expected to reach $1.4 trillion by 2023. 

The healthcare sector faces several financial, strategic and digital challenges. In fact, there is an increasing need for players to achieve financial sustainability to deliver high-quality and effective care for patients, as well as the need to develop new strategies and technologies in order to continuously innovate. Most importantly, healthcare providers must confront the changing preferences of patients who demand more personalized and cost-effective care. In this perspective, technology facilitates greater value at a reduced cost. Indeed, technology and digital transformation are key growth drivers as they represent the foundation for new care delivery models, driving cheaper, more precise and less invasive treatments and therapies.    

Inside the healthcare sector, the Diagnostics and Imaging with Advanced Therapies divisions represent Siemens Healthineer’s core businesses. Both were only slightly impacted by the current Covid-19 context. Such resilience was partially driven by the company’s business model and the healthy geographic diversification of the group. From this perspective, the acquisition of Varian Medical Systems acquisition will result in a global healthcare leader with the most comprehensive cancer treatment portfolio in the industry.  

Deal Rationale:  

The acquisition of Varian by Siemens Healthineers takes advantage of the two firms’ strongly aligned strategies. On one side, Siemens Healthineers’ upgrading phase strategy aims at expanding the business in adjacent growth markets in the mid-term period, and in addition to structural costs savings, it prioritizes the creation of next-gen products and platforms that focus on the digital dimension, data and AI. On the other side, Varian’s objectives are linked to improving efficiency, the exploitation of new technologies such as Artificial Intelligence or machine learning and the creation of long-term growth through the expansion in emerging geographies and businesses. Common goals and strategies for the mid- and long-term period create a better match between the two firms and enhance the probability of the deal’s success. 

The rationale behind the Siemens Healthineers’ acquisition of Varian can be identified in two core factors. The creation of a highly integrated portfolio for cancer care under its several dimensions and phases, and the reinforcement of the firms’ position in the healthcare industry.  

The acquisition of Varian allows for the creation of deeply integrated and comprehensive products and services in cancer care. The two firms will combine their competences in diagnostic, imaging and radiotherapy to offer a broader spectrum of high-quality diagnosis, treatment and cancer care solutions for patients. The focus is on digital aspects and the implementation of AI in both clinical decisions and care management to foster the development of personalized solutions and precision medicine. Moreover, the acquisition aims at accelerating the enrichment of digital offerings and exploiting larger sales, R&D and production, thus possibly making cancer care more accessible and affordable.   

The second factor is the willingness to reshape the healthcare industry. The two firms aim at improving their position in the sector and consolidating an already existing partnership between the two companies.   

The desired impact on the industry should be originated by a strong cultural fit between Varian and Siemens Healthineers, in terms of innovation and purpose-driven culture.  The exploitation of a mix of revenue and cost synergies arising by the scale of the two firms, the cross-selling opportunities and the complementarity between different offerings, and the network of R&D activities are only some of the advantages projected for the company in the next few years.   

Deal Structure: 

Siemens Healthineers will acquire 100% of Varian’s outstanding shares for $177.50 per share, representing a 24% share premium over Varian’s closing price of $142.72 on July 31 ,2020 and a 42% premium over the 30-day weighted average. The total equity value of this all-cash transaction is $16.4 bn which corresponds to 34 times Varian’s forward earnings. After the announcement of the deal, Varian’s share price rose by 22%, whilst Siemens’s share price fell by 6.7% as markets were concerned about the high price of the transaction. 

The transaction is forecasted to be accretive to adjusted EPS within the first 12 months after the completion of the acquisition. EBIT synergies are expected to amount to €300 mln per annum in fiscal year 2025 and to increase sharply in subsequent years. 

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The financing will be provided through a combination of debt and equity. The transaction will be first financed through a €15.2bn bridge facility which will be granted by Siemens Finance B.V. Siemens intends to repay 50% of the amount of the bridge loan through the issuance of new equity at Siemens Healthineers level, which will increase the free float. Subscription rights will probably be excluded. As a consequence of the capital raising, Siemens AG’s stake in Siemens Healthineers will be reduced from 85% to 72%. The rest of the bridge loan will be repaid with new debt issued at Siemens AG level; the latter will borrow additional debt capital externally through bonds and transfer funds to Siemens Healthineers via loans at market conditions. 

The acquisition is expected to close in the first half of calendar year 2021 as it is subject to the approval of Varian’s shareholders and regulatory approvals. The board of directors of Varian has already approved the transaction unanimously. 


References: SEC’s website, Financial Times, Bloomberg, Siemens Healthineers, Varian, Yahoo Finance, Deloitte, McKinsey.


To contact the authors:

Edouard Barret

Giulia Bonacina

Maria Alessandra Cinotti

Riccardo Colombo

Valentina Giordano

Daniele Rabusin