The Big Winner in Tiny Mergers

When one tiny company takes out another, there can be only one winner.

Accuray (Nasdaq: ARAY  ) announced yesterday that it was purchasing fellow radiation-therapy maker TomoTherapy (Nasdaq: TOMO  ) for $277 million. Accuray is only a $550 million company itself.

The cash-and-stock deal values TomoTherapy at $4.80 per share, a 31% increase over the previous closing price. Or at least it was before Accuray fell 10% yesterday. Apparently Accuray's investors weren't all that excited about the acquisition.

On one hand, this reminds me of Intuitive Surgical's (Nasdaq: ISRG  ) 2003 acquisition of Computer Motion. As a relatively small company at the time, snatching up a competitor and diluting shareholders with an all-stock deal seemed risky. Of course, everything worked out just dandy; since announcing the purchase of Computer Motion, Intuitive Surgical has increased 3,800%!

But the radiation system business isn't the same as the robotic surgery business because there are a couple of really big players in the space. Intuitive Surgical had -- and still does have -- the market all to itself. Accuray is still going to have to compete with Varian Medical Systems (NYSE: VAR  ) , Siemens (NYSE: SI  ) , and Elekta, and their serious marketing might.

Having two models to sell should help the combined company work more efficiently; the new company will essentially have double the sales force selling each product. But I'm not sure it'll be enough to get Accuray on a level playing field.

TomoTherapy shareholders are clearly the big near-term winners, but the biggest winner in the acquisition may end up being a company like General Electric (NYSE: GE  ) or maybe even Intuitive Surgical, which now has the opportunity in a few years to snatch up two radiation-therapy products in one acquisition.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On March 11, 2011, at 1:19 PM, RadPhysicist wrote:

    A number of problems were pointed out in the conference call this week. However, there were areas of discussion between the analysts and the company that did not make sense.

    1. Tomotherapy Service:

    Accuray claims that they will be able to address these problems: better reliability in parts and service. This seems to be unlikely since the two companies have very different equipment and experience. More than likely they will address this through increasing the service contract costs to their customers, and decreasing the number of service engineers in the field. This could easily reduce future sales in the America region as well as reduce future upgrades and system replacement for existing customers.

    Reliability in parts is difficult to overcome since parts are limited by a few manufacturers and there a few options to solve this problem. Field service is a large problem with customer satisfaction and cost. It will be interesting to see how Accuray manages this.

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