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Roper Industries (ROP) the diversified industrial technology company announced that it acquired privately held Sunquest Information Systems on Monday. Roper will pay $1.42 billion for the diagnostic and laboratory software maker.

The Deal

Roper Industries says that the deal will boost its medical software platform. Roper Industries sees the medical division benefiting from an aging population and expansion of anatomic pathology. Roper currently produces a range of medical and imaging devices. It also produces radio frequency products.

CEO Jellison commented on the deal, "we continue to transform the enterprise with the addition of Sunquest. We expect Sunquest to benefit in all economic environments from very favorable market forces."

Roper Industries expects the deal to be accretive to earnings immediately. The deal is expected to close within 30 days, including $25 million in tax benefits. The company has already been in talks with Sunquest since 2010. The acquisition will add about $75 million in revenues in the final four months of 2012 and boost earnings per share by $0.12-$0.14.

Based on this information we can estimate Sunquest's annual revenues around $225 million. The company is expected to boost EBITDA by $140 million in 2013 and earnings by around $0.40 per share (based on the $0.12-$0.14 accretion for the final four months of 2012). This implies that Roper Industries paid approximately 6 times annual revenues, 10 times EBITDA and 35 times annual earnings for the company, making the acquisition anything but a bargain. The company did not provide any esimated annual synergies to be achieved from the deal. Furthermore no estimate regarding the financing costs was given.

Shares of Roper Industries ended Monday little over 1% higher to $99.64 after trading at an intra-day high of $108.89 per share.

Earnings

Besides the acquisition, Roper Industries also announced its second quarter results. The company reported a net income of $115 million, or $1.15 per share, coming in at the high end of its own forecasts of $1.11-$1.15 per share. Revenues rose 3.6% to $725 million, coming in below analysts expectations of $747 million. Net orders grew strongly from $708 million to $763 million, adding further to the company's backlog.

Outlook

For the full year of 2012 Roper Industries now anticipates earnings per share of $4.84-$5.00. The update reflects a $0.04 headwind caused by the strong US dollar and an addition of $0.12-$0.14 as a result of the acquisition of Sunquest.

Valuation

Roper Industries ended its second quarter with $519 million in cash and equivalents. It operates with roughly $1.07 billion in short and long term debt for a net debt position of $550 million. For the first six months of 2012 the company generated $1.44 billion in net revenues on which the company net earned $223 million, or $2.24 per share. EBITDA came in at 419 million. The company's net debt position will increase to roughly $2 billion as a result of the deal, which will be a manageable burden for a company of this size.

Based on a rough 2012 annual revenue estimate of $3.0 billion and net earnings of around $500 million, the market values Roper Industries at 3.3 times annual revenues and 20 times annual earnings. This valuation compares to a 2.0 times annual revenue multiple for Agilent Technologies (A) and a 2.2 times revenue multiple for Danaher (DHR). Both competitors trade at 12 and 17 times annual earnings, respectively.

Roper Industries currently pays a quarterly dividend of $0.14 per share, for a mere 0.5% annual dividend yield.

Investment Thesis

Shares of Roper Industries have performed relatively well so far in 2012. Since the beginning of January shares have returned 15%, trading near their all time highs. On Monday shares almost hit $109 in a reaction to the second quarter earnings report and the announcement of the acquisition.

Over the past decade shares have returned over 500% as investors reward the carefully executed acquisition based strategy of the company. Its latest acquisition, which seems well prepared given that initial discussions already started in 2010, is well received by the market as well.

Despite the fact that the latest addition seems somewhat on the "expensive" side, investors have long term trust in management who has a proven track-record with acquisitions.

Despite the nice acquisition I think Roper Industries trades at a full valuation. At these levels I see few triggers for a short term outperformance, while the company remains vulnerable to an economic slowdown. I remain on the sideline.

Source: Roper - Acquisition Of Sunquest Is Nice Long-Term Addition