GE cuts deal to acquire Lunar

Deal opens door to bone densitometry and dedicated MRI

GE Medical Systems has signed a definitive agreement to acquire Lunar of Madison, WI. The acquisition, announced June 2 and scheduled to close within 60 to 90 days, promises to transform GEMS into a global leader in the bone densitometry market and affords the opportunity to go head-to-head against rival Siemens in the dedicated extremity MRI segment.

"This merger fits what you have seen us do over the last few years, which is to extend our reach by acquiring technologies that complement our technical base and that we can leverage using our distribution organization," said Jeffrey R. Immelt, GEMS president and CEO.

GE said the deal, valued at about $150 million, will net Lunar stockholders $17 a share in GE stock, about $6 more than GE's stock was trading at prior to the announcement. The exchange rate for shares will be based on the trading prices of GE stock for a time prior to the closing of the transaction, which is expected in the third quarter of this year. For the 12 months ending March 31, 2000, Lunar reported revenue of $91 million and net income of $7 million.

Shareholder approval is still required, but the deal is all but assured of going through. Lunar chairman and CEO Richard Mazess, Ph.D., who holds 30% of the outstanding shares, has agreed to vote in favor of the deal. Further, the agreement, which has been approved by the boards of directors of both companies, allows GE to purchase up to 19.9% of the outstanding shares prior to the deal closing, thereby providing GE with a possible 49.9% of the voting stock.

Until now, GE has been a minor player in the bone densitometry market. The company has offered only a quantitative package for use with CT scanners and, most recently, a product obtained through an alliance with Pronosco that calculates bone density from radiographs. In contrast, Lunar is a market leader in bone densitometry, offering four x-ray-based densitometers and two ultrasound densitometers. Sales of these systems accounted for about 80% of Lunar's global new product revenue in fiscal 1999.

The market for densitometers has not been particularly good for Lunar lately. Demand leveled off two years ago and has shown little growth since then as sites with high-capacity x-ray densitometers have increased throughput, thereby cutting demand for new units, while lower cost x-ray and ultrasound units have failed to gain a strong interest from primary-care physicians.

"The U.S. market has become saturated and we expect to see only 4% to 5% growth, but the global market is very big and very much underserved," Immelt said. "We think that is where double-digit growth is going to come from in the next five years."

Mazess identified Asia and Latin America as offering the best hope for expanded sales. The merger with GE and access to its distribution organization in those areas will be critical to capitalizing on the opportunities, he said. The sale of lower cost units, such as the ultrasonometers, might also pick up in the U.S., according to Mazess, if third-party payers extend reimbursement coverage to women under 65.

Lunar's MRI business might also benefit from the company's acquisition by GE. Since the early 1990s, Lunar has sold dedicated extremity MRI scanners in the U.S., largely to the orthopedic community. Last fiscal year, sales of these units accounted for about 20% of the company's revenue. Siemens Medical Systems is today the only major radiology vendor offering such a system. Ironically, if the Lunar acquisition goes through, GE will be selling virtually the same extremity scanner as Siemens.

Italy-based Esaote provides E-Scan to Lunar and Jazz to Siemens. The primary difference between the two is the interface, which for Jazz was customized to match that of other Siemens MRI scanners. Whether GE will try to customize the E-Scan interface to match its own scanners has not yet been decided, Immelt said. There is little doubt, however, that GE will be able to include E-Scan in its product line.

"Lunar is continuing as an entity so there is no conflict involved as far as the agreement with Esaote," Mazess said. "We compete with Siemens today."

The only product line with a conflict is Lunar's mini-x-ray C-arm product, called ORCA. Late last year, GE acquired OEC Medical, which specializes in mobile C-arm products. Mazess said, however, that ORCA sales are negligible and that the technology will likely be transferred to OEC in Salt Lake City.

Overall, the deal is viewed positively by Lunar management, according to Mazess. There will be some personnel consolidation, however. Most will be on the administrative side, particularly finance and legal, although other groups, such as service, will be affected.

"We aren't hands-off guys, but we have a good history of building on the franchise," Immelt said.