A is for Agilent
Story Filed: Friday, May 12, 2000 3:57 PM EST
New York, May 12, 2000 (123Jump via COMTEX) -- Perhaps you've noticed that today's technology turnover rate is high; the implication being that if a company wants to succeed in the sector, it needs agility. This was the logic behind Hewlett-Packard's (HWP) spin off called Agilent Technologies (A). Both companies felt that as independents, their interests would be better served.
Agilent technologies is comprised of four segments of Hewlett-Packard, and was formed on March 2, 1999. After Agilent's IPO in November, HP still owned 84.1% of Agilent's outstanding stock. Now HP is letting go of its control over Agilent to allow the company to pursue goals asymmetric to HP's. The spin-off is expected to be completed by June 2, 2000 when HP distributes the 84.1% hold on Agilent to its own shareholders.
Agilent was created to handle four of HP's functions to allow both companies to focus on increasingly incongruous core competencies. These four business segments in order of revenue are, Test & Measurement ($4.1 billion/49%), Semiconductor Products ($1.7 billion/21%), Healthcare Solutions ($1.5 billion/18%) and Chemical Analysis ($1 billion/12%). The former two of these are closely linked, and the latter two work closely with each other with mutual customers and projects.
Relationship with Hewlett-Packard
It is important to note immediately that HP is not keeping Agilent alive in any way at this point. While "Products to Hewlett-Packard" is included on their statement of earnings, they list a meager $140 million for the quarter ended January 31. "Products Revenue" (other than HP) totals $1,777 million, and services are at $329 million. At 6.2% of revenues for Q1 2000, HP can even be omitted from SEC filings as a major customer (generally at 10%+). It is reassuring to see that dependence on HP, particularly in the semiconductor segment, has decreased since 1999. What often happens in spin-offs and autonomous divisions is the parent company becomes a major customer of the child company. This arrangement taints management to follow parent rather than market demands. This does not hold in the Agilent/HP case, especially when bolstered with HP's final divestiture of its Agilent shares on June 2.
Another effort that separates Agilent from HP is its purchasing pattern; many products purchased from HP are at third-party prices so products can be sold to third parties or used internally. For 1999, the ratio of third-party cost to at-cost purchases from HP was roughly 4:3. On top of basic at-cost pricing the companies offer each other, there is a slew of agreements that monitor their separation until November 2001. After that date cross-pricing increases. In sum, it seems that HP and Agilent are feeding off of each others economies of scale in respect to product exchange pricing. Although they mention in management discussions that loss of such purchasing power may increase costs and decrease profitability for Agilent, it does not seem likely that this item will substantially affect Agilent's performance. For the near term, prices of some goods will increase 5% and in the 12-18 month range, 10%.
On a similar note, perhaps the largest benefit that Agilent receives from HP is access to internal data regarding the direction that HP is taking with their company and product lines. For Q1 2000, HP accounts for 6.2% of total net revenue, but as an extreme example, accounts for 29.5% of their semiconductor products segment revenue. That's a half-billion dollar customer advantage Agilent has now, and if HP decides to truly stand Agilent on its own, a significant portion of that sales revenue, or significant contracts, could be lost to competitors. Sales of PCs and inkjet printers were significantly down in 1999 for HP, and Agilent no doubt had advance notice of this market trend, and HP's response to it, and could themselves respond appropriately. Alternatively, if greater numbers of semiconductors were required, Agilent would be first to know - this advantage is not guaranteed as they become a separate entity.
One of the benefits that Agilent will have as a separate entity from HP is greater market flexibility. While having HP as a motherly buyer is attractive, the overall market is bigger and holds more potential. Following the example above involving Agilent's semiconductor segment, the company's balance sheet will not be affected by poorly performing HP divisions like inkjet printers and PCs. It is much easier for Agilent to say "No" to HP. While operating as an internal operating body to HP, HP can easily demand that Agilent continue to produce products at a decreasing margin or increase inventory to supply HP in the event of a market rebound. Such a loss would be absorbed by Agilent and by HP to a regrettable but sustainable degree; the loss to Agilent's division would be great, but to HP the cost advantage may be a benefit.
A formative example of this can be found as far back as 1991 at HP Laboratories, which is now an Agilent function. Joel Birnbaum, director of the labs at the time, began to feel that researchers were pursuing HP's existing goals and businesses to a degree that risked excluding newly emerging fields. It was then that Birnbaum decided to autonomize the industrial research functions of HP. As Ned Barnholdt, current CEO of Agilent puts it: "We were pretty invisible within HP - the business models, requirements and agendas of the two businesses had gotten so different."
The decision to spin-off was based on a need for both companies to remain innovative, a concept that Agilent holds high in company statements today. Buckingham Research Group comments that the separation will lead to improved strategic focus on fast development and fast production ramps. With reduced time-to-market and the high-volume manufacturing that Agilent can accommodate, the company will realize gains from their greater independence.
Business Segment Interaction
Agilent is involved in a wide array of technology and infrastructure development. The recognized need to replace traditional telecommunication networks has Agilent investigating most major market trends; from fibre optics to high-speed electronic components to wireless Internet. Especially noted was the increasing role wireless is playing in less developed countries where a traditional infrastructure is non-existent. The test and measurement segment of Agilent benefits from these markets where sophisticated equipment needs to be monitored closely to maximize performance. The semiconductors and electronics segment derives growth potential for similar reasons, and creates a synergy with test and measurement as its components need to be tested. In this manner, a semiconductor product can be created for ease of testing with an Agilent measurement device, and the measurement device can be simultaneously developed to be extremely compatible.
A second party arrangement with Rambus places Agilent in synch with one of the world's leading memory chip manufacturers. As stated in their 1999 10-K, the semiconductor market's automatic test equipment demand will increase 20% over the next 5 years, starting from $3.3 billion in 1998 (VLSI Research). Morgan Stanley targets the test & measurement and semiconductor segments for almost all of the incremental growth of Agilent; at 7% until 2001 for the former, and at 8% and 20% for the latter in F2000 and F2001 respectively.
Again, test and measurement derives support from both the healthcare solutions and chemical analysis segments for similar reasons. The reasoning here is that as drug companies seeking to reduce time-to-market of new drugs and increase productivity in the R&D process, they can employ Agilent's analytical instruments. Just as sophisticated equipment is required for wireless groundstation monitoring, DNA analysis needs specialized tools as well. From the overview of the seemingly distinct businesses above, Agilent has found synergies within these markets that warrant a corporate division along these lines. As a result they are entering major emerging and high-growth markets such as wireless, broadband, bio-tech, pharmaceuticals and fiber-optics.
International
It is reassuring to see that Agilent is a world-class company; 55.2% of their net revenue for 1999 (their fiscal year ends October 31) was internationally reaped, the other 44.8% generated in the U.S. Agilent also has major research centers in both Europe and Asia, including China. Revenue streams for Europe (from 1999, up 22%), Asia (+25%) and America (+23%) are fairly consistent, indicating a consistent effort on the part of Agilent to pursue revenues globally. On an inconsistent currency basis, order growth in Asia is more than double that of America; much of this growth is diminished when currency variations are normalized; from 57% to 42%, where America stays par at 25%, and Europe even increases from 21% to 26%.
While revenue streams were adversely affected for Agilent during the recent Asian crisis, the strength of their position in Asia is still strong and will benefit as the region recovers over time. Regardless of a potential recovery, the region is beginning to develop its technological infrastructure. This process has proven to be exponential in other regions, and is estimated to be so in this case. The spearheads of Asia in this respect are Japan, Korea, Malaysia and Singapore; all of which Agilent has major R&D and manufacturing sites placed. An inroad into China is valuable for the market potential, as well as for the political advantages a long term presence there provides.
Stock Info
November 17, 1999 Agilent floated 72 million shares at $30 each in an eagerly awaited IPO, and well above an initial range of $19-$22. The offering raised more than $2 billion for the company as they watched the stock rise more than 40% that day. At the time of writing, shares of Agilent traded around $77, 70% up from their IPO pricing. Agilent has hit highs of $162 dollars, and lows of 39 13/16 - still well above their pricing in November.
On June 2, Hewlett-Packard will complete its spin-off of Agilent, distributing 84.1% of the company to HP shareowners. Every shareowner of HWP on May 2 will receive .3814 Agilent shares, according to recent calculations done by HP. There are two tickers for HWP until the distribution: HWP and HWP.WI. The former is shares of Hewlett-Packard with Agilent built in, and the latter is HP without the Agilent share priviledge. There is tremendous hype surrounding the company as it transcends being invisible to being a diversified company with hot opportunities in major emerging market segments.
Agilent, which trades on the NYSE like its daddy HWP, will be a company unto its own on June 2 if HP does indeed distribute the company to its shareholders. Exactly 380,000,000 Agilent shares will be unlocking on the 15th of this month. It is generally seen that a ticker with a lockup expiry tends to lose value the week before a lockup expiry, and especially the day of the expiry. This trend has been respected this week, regardless of the fact that there will be no added liquidity until June 2.
HWP, tied for the moment to Agilent, has not followed this trend at all - although .3814 of its share price is Agilent. It could be that the lockup is not causing the downtrend, and that the cause is their upcoming earnings report on May 16 combined with this week's general downtrend. There may be devaluation on the 2nd as HWP shareholders exchange their Agilent shares for cash, being content with their holdings of the parent company. Agilent will be reporting their Q2 earnings on the 16th, with an IBES concensus estimate of 32 cents per share.
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