Elscint parent to buy Diasonics as ultrasound consolidation continues

Future success hinges on smooth integration of firms

It's no surprisethat the ultrasound industry has been due for a major dose ofconsolidation as health-care reform wreaks havoc on the bottomlines of ultrasound vendors. The merger of ATL and Interspec wasa harbinger of things to come in the modality (SCAN 2/16/94).Few industry analysts, however, were expecting the news that arrivedJuly 12, when Elscint parent Elbit announced that it would buyDiasonics Ultrasound for $70 million.

It is a marriage of unlikely bedfellows, but if all goes wellthe union could work handsomely for both parties. Elbit will gaina subsidiary with a reputation for high-quality ultrasound technologyto round out the imaging modalities offered by Elscint. Diasonics,meanwhile, will receive the financial backing needed to removenagging doubts about the firm's long-term viability.

The acquisition is the outgrowth of discussions that beganearlier this year between Diasonics and Elbit on strategic businessopportunities, according to Diasonics CEO Bruce Moore. Those discussionsevolved into an unsolicited merger proposal, Moore said.

The offer calls for Elbit to pay $5.50 a share for Diasonicsstock, which closed at $3.75 the day before the deal was announced.The merger is contingent on the approval of Diasonics stockholders,who will vote on the deal at their annual meeting in September.

Elbit, of Haifa, Israel, got its start as a defense electronicsfirm, but of late has been expanding into commercial areas. Elbitbought a controlling interest in Elscint in 1989 (SCAN 11/22/89).The parent company had revenues of $600 million last year, ofwhich Elscint contributed $238 million.

The success of a post-merger Diasonics could depend on howmuch running room Elbit gives its new subsidiary. Preliminaryindications are that Diasonics will be given free rein, at leastinitially. Diasonics will be an independent subsidiary of Elbitand a sister company to Elscint. There will be few personnel changesas a result of the merger, nor will there be any changes to thesales and marketing structures of the companies, according toElbit.

Elbit will have to tread carefully in its handling of Diasonicsin the future, however. Exerting too much control over the firmcould stifle much of the technological innovation for which Diasonicsis well-known.

"The question is, who will control Diasonics?" saidconsultant Harvey Klein of Klein Biomedical Consultants in NewYork City. "If the Israelis control Diasonics, there couldbe a major clash of cultures. That is something that I'll watchclosely."

Elscint's nascent ultrasound effort will be incorporated intoDiasonics. Elscint to date has been a minor player in ultrasound,and the company formed Elscintec earlier this year as a new subsidiaryto improve its prospects in mammography and ultrasound (SCAN 2/2/94).There are about 15 to 20 engineers at Elscintec who will be transferredto Diasonics headquarters in Milpitas, CA, Moore said. Elscintec'sESI line of scanners will continue to be offered.

A shot in the arm. The merger will free Diasonics from worriesabout its financial position in the industry. The company hassuffered two years of red ink, although it began to turn the corneron profitability this year. Pressure on Diasonics increased lastyear, when the ultrasound business was split off from the moreprofitable x-ray unit, OEC-Diasonics, which became OEC MedicalSystems (SCAN 8/25/93).

Diasonics was not in danger of running out of capital at thetime the Elbit acquisition was announced, however, Moore said.The company has a strong balance sheet, with $24 million in cash.But partnering with Elbit will remove doubts about whether Diasonicsis in for the long haul.

"We had the financial resources to succeed, we had thehuman resources to succeed, we had the technology to succeed,"Moore said. "But this opportunity allows us to accelerateour growth plan. It solves one of the major stumbling blocks thatDiasonics has faced, which is, what is our long-term financialfuture?"One of the first items on the post-merger agendawill be to develop a mid-range version of Diasonics' premium VSTultrasound scanner, according to Moore. Diasonics has had itseye on the growing mid-range segment for some time, but lackedthe resources to develop a new scanner. Other developments couldoccur as the result of technology transfers between Elbit, Elscintand Diasonics.

Elbit hopes to achieve R&D synergy by combining the assetsof its MRI, CT, nuclear medicine and ultrasound technologies,Elbit president Emmanuel Gill told SCAN.

"Combining our capabilities in all of these modalitiesmay lead to a futuristic integrated approach of `sensor fusion'with diagnostic capabilities way beyond those offered today byany single modality," Gill said. "We intend to havea significant presence in the diagnostic market when these technologicalinnovations materialize."

Elbit could be buying into the ultrasound market at just theright time. After a prolonged slump, the dedicated ultrasoundvendors are beginning to show improved financial results, andsome industry observers believe that the modality could be wakingup from its long hibernation.

The most recent financial numbers released by Diasonics hintthat the ice could be breaking. The company last week reportedthat net sales for the second quarter (end-June) were $50.2 million,up 13% from $44.4 million in the same period a year ago. Net incomewas also up sharply, with Diasonics reporting a profit for thequarter of $1.3 million, compared with a net loss of $3.1 millionin the second quarter last year. This year's results included$2 million in earnings, net of taxes and legal fees in connectionwith the settlement of patent litigation with Acuson, Diasonicsreported.