Drinking In 3M's CUNO Purchase

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With its purchase of water filtration products maker CUNO (Nasdaq: CUNO), 3M (NYSE: MMM) will add yet another set of specialized products to its plethora of offerings. Water filtration is more than just an attractive niche, however. Given the broad applications of CUNO's technology, the deal represents a great complement.

3M will pay $72 per share in cash for CUNO, which amounts to a 31% premium to the stock's closing price on Wednesday. The deal, which is valued at $1.35 billion including the assumption of $60 million in debt, is just the latest in a number of acquisitions in the filtration area in the past year. CUNO itself purchased WTC Industries about a year ago, while General Electric (NYSE: GE) agreed to buy CUNO competitor Ionics last November. Water filtration is a clearly hot segment.

The reason for the interest in the area becomes clear when one understands the potential. While CUNO does indeed operate in a niche, its revenue stream is very diversified in terms of customers. CUNO has three main units -- potable water, fluid processing, and health care -- through which it supplies filters for, among other things, home appliances, electronics manufacturing, and pharmaceutical/biotech manufacturing and diagnostics. This broad client base mirrors 3M's own mix of customers, although 3M achieves its mix by selling a wide variety of products.

In addition to serving a range of clients, CUNO is also diversified when it comes to geographic reach. In addition to a solid domestic business, it has experienced particularly strong growth in the Asia/Pacific region. Further, the company generated 47% of its revenue last year from the international market. Again, there are parallels with 3M, as the conglomerate expects it will increasingly rely on overseas sales for growth.

While 3M is definitely paying up for CUNO, the possibilities for long-term growth in filtration are significant. Investors shouldn't be wondering whether this deal holds water.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.