Diversified U.S. manufacturer 3M Co on Monday said it agreed to buy Cogent Inc for more than $900 million, paying a nearly 18 percent premium for the biometric identification systems company.
3M said it would pay $10.50 a share to buy Cogent, whose shares jumped 19.8 percent to $10.68 in early trading, suggesting the market considers a rival bid possible. 3M shares were down 40 cents at $80.60.
Cogent, based in Pasadena, California, makes automated fingerprint and palmprint identification systems -- called biometrics -- that allow its customers to capture fingerprint and palm print images electronically, encode prints into searchable files, and compare sets of prints.
3M makes systems for creating and validating documents like passports, as well as products used at national borders. It said the deal will help it expand in the market for law enforcement systems, and estimates the $4 billion biometric market will grow by 20 percent a year.
3M's Chief Executive George Buckley said last week that the company could spend about $2 billion on acquisitions in 2010, double its previous estimate for the year.
About half of Cogent's revenues come from the U.S. Department of Homeland Security, so a rival bid by overseas rivals like France's Safran or Japan's NEC Corp. was not likely, said analyst Frederick Ziegel of Blue Water Capital Markets LLC.
It's very heavily government business and it's very heavily big deals. That is a recipe for very volatile financial results, Ziegel said, adding that biometrics companies were typically valued at about three to four times 2011 sales, and the Cogent deal falls in that range.
TARGETING LAW ENFORCERS
Biometrics has become a widely accepted technology around the world although privacy concerns have posed a barrier to its adoption in some markets. The technology is moving toward mobile applications, such as handheld scanners, for uses like law enforcement and voting.
3M said the deal was worth $943 million, but a calculation based on 88.8 million Cogent shares outstanding put the value at $932 million. A 3M spokeswoman said she was not immediately able to explain the slight discrepancy.
Net of cash acquired in the deal, 3M said it was paying $430 million for Cogent. The transaction is expected to close during the fourth quarter of the year.
Cogent had about $130 million in revenue in 2009. 3M expects the purchase to be dilutive to earnings by 9 to 10 cents per share over the first 12 months after closing. Excluding purchase accounting adjustments and integration costs, its expects the deal to add to earnings by 1 to 2 cents per share.
J.P. Morgan advised 3M, while Credit Suisse and Goldman Sachs acted as financial advisers to Cogent Systems.
A series of deals for mid-tier defense companies has lifted valuations of companies that provide the niche surveillance and intelligence technologies.
It is an area where large defense contractors like Boeing have been stepping up investment. As the United States strengthens its focus on national security, Boeing's peers Lockheed Martin Corp, Northrop Grumman, General Dynamics, Goodrich Corp and BAE Systems Plc, are eyeing a bigger slice of the surveillance and intelligence market.
Cogent competitor L-1 Identity Solutions, a maker of fingerprint and iris recognition devices, said last week it was close to announcing a deal, which analysts peg at around $1 billion. L-1 put itself up for sale in March.
L-1 shares were down 2.9 percent in early trading to $8.66.
France's Safran could end up winning that business, said Ziegel, of Blue Water.
Safran has taken a couple of deals from Cogent, and maybe that's partly driving this deal with 3M, Ziegel said.
(Additional reporting by Michael Erman in New York and Bijoy Anandoth Koyitty in Bangalore, editing by Dave Zimmerman)