Last Tuesday, American Science & Engineering Inc. (“AS&E”) ASEI announced a definitive agreement with OSI Systems, Inc. OSIS wherein the latter agreed to acquire AS&E for about $269 million in cash. Per the transaction, OSI Systems will pay $37.00 per share in cash, which represents a premium of about 25% over the recent 90-day average price, according to AS&E.
The deal, although quite synergistic at first glance, has attracted major attention from securities law firms who believe that the deal does not represent the best possible value for AS&E shareholders.
Let’s analyze the drivers and details of the deal.
Rationale for Deal
AS&E is a leading provider of detection solutions like X-ray technology for the inspection of cargo, packages and personnel. The company was enjoying impressive operational momentum half a decade back, driven by the U.S. military presence in Iraq and Afghanistan.
However, post the withdrawal of the U.S. troops, the company’s business deteriorated radically. For the fiscal year ended Mar 2016, sales fell 19% year over year, with the company posting an operating loss of $5.3 million.
These trends, coupled with strained external growth factors, might have been a key driver for the merger deal. However, the company does have a strong commercial business, and a proliferation of terrorist attacks and threats continues to drive growth in some key products of the company.
Prior to the announcement of the deal, AS&E’s stock had plunged nearly 30% in the past one year period.
Expected Synergies
AS&E’s X-ray technologies will be complementary to OSI Systems’ existing operations, and will create a robust foothold in the markets for Cargo and general Aviation security screening. The deal will help both the companies in expanding security portfolio, enhancing product development capabilities, and expanding in lucrative end markets and geographies.
Supported by a global sales and service presence, the merger would likely generate significant cost synergies, which is expected to form a foundation for accelerated growth in revenues and profits.The companies expect to unlock annual pre-tax cost synergies of at least $18 million within the first two years after the conclusion of the transaction, which is likely to be by the end of this year.
Investor Concerns about the Deal
However, since the announcement of the deal, several securities litigation law firms, including WeissLaw LLP, Pomerantz LLP and Ryan & Maniskas, LLP, have launched an investigation into the transaction.
These firms believe that AS&E’s proposed buyout to be an undervaluation of the company that might not result in any real gain for many long-term shareholders of the company.
The purchase price of $37.00 per share is virtually no premium over the share’s 52-week high of $46.46. Additionally, the deal is expected to be considerably accretive to OSI Systems' earnings, with an expected growth of a minimum of 10% per share in fiscal year 2018.
The firms will look into a possible breach of fiduciary duty and other violations of state law by the AS&E’s board of directors, for not acting in the best interests of the company’s shareholders with regards to the sale process. In other words, they will try to determine whether AS&E’s board of directors failed to get the best possible value for the company’s shareholders.
Some other stocks in the same space that could be worth a look now include BAE Systems plc BAESY and TransDigm Group Incorporated TDG, both sporting a Zacks Rank #1 (Strong Buy).
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