By Calvin Biesecker
FLIR Corp. [FLIR], a leader in imaging systems for surveillance and targeting for government and commercial customers, yesterday said it has agreed to acquire ICx Technologies [ICXT] for $274 million in cash in a deal that will bolster its surveillance solutions with radar, add a suite of detection products in the chemical, biological, nuclear and explosives space, and give it additional systems integration capabilities.
The agreement assumes a $7.55 purchase price for each share of ICx common stock, less than half the price the company’s shares garnered at its initial public offering in November 2007. Following the initial offering, ICx’ stock price quickly tumbled due to uncertainties in the security market (Defense Daily, Nov. 19, 2007).
However, in late July, ICx’ stock price was over $8.00 and at least two law firms yesterday said they would investigate whether the company’s board of directors breached their fiduciary duty by agreeing to sell the company before adequately shopping it around. Benchmark Capital security analyst Josephine Millward said in a note to clients that her sources suggest that there could still be another bidder among the large defense contractors for ICx.
At the end of trading yesterday, ICx’ stock price closed at $7.71, up 96 cents, or more than 14 percent from Friday, higher than FLIR’s offering price, indicating that investors believe a larger bid may be in store.
The transaction is expected to close in the fourth quarter of 2010 subject to regulatory approvals and the tendering of a majority of the shares of outstanding ICx common stock. The private equity firm Wexford Capital, which owns 62 percent of ICx’ common stock, has agreed to tender all of its shares.
FLIR expects the acquisition to be neutral to earnings in 2010, excluding transaction costs and one-time charges, which it expects may top $8 million. Beginning next year, it expects ICx to be accretive to earnings although it offered no specifics in terms of guidance.
FLIR said the main reason for acquiring ICx is the strategic aspects the company’s product suite and capabilities offers. FLIR plans to retain ICx CEO Colin Cumming to continue to run the business, which will be integrated into FLIR’s Government Systems Division
Earl Lewis, FLIR’s president and CEO, highlighted a number of areas where ICx offers FLIR growth opportunities. One is ICx’ radar capabilities, which he believes can ultimately be integrated with FLIR’s imaging and laser systems.
“Laser, radar and infrared go hand-in-hand in many applications,” Lewis said during a conference call with analysts to discuss the transaction.
In addition to the radar capabilities, ICx brings a healthy product portfolio that includes well regarded handheld systems for detecting chemical, radiological, nuclear and explosive threats, indoor and outdoor monitoring equipment for biological events, and mobile tower platforms that integrate cameras and radars for border, base and critical infrastructure protection.
Lewis said that he eventually sees the security market demanding the integration of chemical, nuclear and other detection systems onto single platforms such as vehicles and towers for various applications including border security.
“And to have that complete suite of technologies and not to try and develop it ourselves is very worth the price we paid,” Lewis said.
Both companies have technology that works well together for border and base security applications.
William Sundermeier, president of FLIR’s Government Services Division, said ICx’ radar technology is good at finding very slow moving targets such as people crawling on the ground and providing high resolution, enabling a camera that is integrated with it to be slewed onto the target. He sees this kind of integration, including chemical, biological, radiological, nuclear and explosives sensors, having “a big future” whether it’s on the battlefield or at forward operating bases.
ICx’ suite of products coupled with their existing integration capabilities will allow FLIR to move up the systems integration chain, Lewis said.
“Customers want more and more technology in smaller packages and they want to do more and more things and they want it all integrated and they want it to give them an answer and this allows us to do a lot more of that,” Lewis said.
FLIR expects to grow ICx’ international sales, which account for around 5 percent of its sales. ICx previously said it expects a total of around $220 million in sales this year. FLIR’s government business, which accounted for $655 million of the company’s $1.1 billion in sales last year, generates 41 percent of its revenue overseas and growing.
Sundermeier said that as FLIR’s international business grows the company is finding more interest in homeland security products.
Lewis also said that FLIR can learn from ICx’ ability to leverage federal research and develop (R&D) funding, something his company hasn’t done. He also said ICx is good at leveraging that R&D into commercial products.
FLIR expects that at least initially, ICx will bring down its operating margins because of ICx’ reliance and low-margin government R&D work for some of its revenues. Lewis said that FLIR would probably work to expand ICx’ balance to favor its product portfolio to improve margins.
Morgan Keegan defense and security analyst Brian Ruttenbur said in a research note that ICx has “historically had significant operational issues” but that FLIR’s “strong track record with integrating and improving acquisitions” that ICx should improve.
Stone Key Partners served as ICx’ financial adviser on the deal.
FLIR said that it is unsure what it will do with ICx’ transportation business, which consists of traffic management and surveillance systems.