Diversified U.S. manufacturer 3M Co said it would buy Cogent Inc for $943 million, paying a nearly 18 percent premium for the maker of identification systems used to screen travelers at border crossings.
3M said it would pay $10.50 a share. Cogent shares jumped 24.4 percent to $11.09 in unusually heavy trading, topping the offer, suggesting the market considers a rival bid possible. 3M shares fell $1.67 to $79.65 on the New York Stock Exchange.
Cogent 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.
Analyst Josephine Millward of Benchmark Co LLC said the deal values Cogent at about 6.6 times estimated 2011 earnings before special items, whereas other deals in the homeland security and defense sectors have produced multiples of at least 8. She said other bidders may emerge.
Potential rival bidders include information technology services companies and systems integrators such as Danaher Corp and Computer Sciences Corp, as well as Lockheed Martin Corp and Northrop Grumman Corp, Millward said in a research note. She rates Cogent shares buy, with a $14 price target.
TARGETING LAW ENFORCERS
3M makes systems for creating and validating documents like passports, as well as technology 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 Chief Executive George Buckley said last week that the company could spend $2 billion on acquisitions this year, double its previous estimate.
About half of Cogent's revenue comes from the U.S. Department of Homeland Security, so bids by foreign firms such as France's Safran and Japan's NEC Corp are 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. He added that biometrics companies are typically valued at three to four times 2011 sales, and the Cogent deal falls within that range.
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, which takes into account the value of stock options and other items, a 3M spokeswoman said.
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.
Cogent, based in Pasadena, California, had about $130 million in revenue in 2009. 3M expects the purchase to dilute its earnings by 9 cents 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 cent to 2 cents per share.
J.P. Morgan advised 3M, while Credit Suisse and Goldman Sachs acted as financial advisers to Cogent.
L-1 DEAL EXPECTED
A series of deals for mid-tier defense companies has lifted valuations of firms that provide the niche surveillance and intelligence technologies.
It is an area where large defense contractors like Boeing Co have been stepping up investment. As the United States strengthens its focus on national security, Boeing peers Lockheed Martin, Northrop Grumman, General Dynamics, Goodrich Corp and BAE Systems Plc are eyeing a bigger slice of the surveillance and intelligence market.
Cogent rival 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 rose 1.2 percent to close at $9.03.
France's Safran could end up winning L-1, said Ziegel of Blue Water. Safran has taken a couple of deals from Cogent, and maybe that's partly driving this deal with 3M, he said.
Millward, of Benchmark Co, citing industry sources, said Safran could announce the acquisition of L-1 as soon as Tuesday, for about $13 per share.
A spokeswoman for Safran said the company does not comment on speculation. L-1 declined to comment.
(Additional reporting by Michael Erman in New York and Bijoy Anandoth Koyitty in Bangalore; Editing by Dave Zimmerman, John Wallace and Richard Chang)