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Cramer’s Takeover & Break-Up Play

Monday, 3 Jun 2013 | 6:26 PM ET
Cramer's Advice: When to Buy Agilent
Monday, 3 Jun 2013 | 6:25 PM ET
Agilent is both a stock with both takeover and breakup prospects, says Mad Money host Jim Cramer. "This stock is worth buying here," he adds.

(Click here for video linked to a searchable transcript of this Mad Money segment)

"There are two things that almost always send a stock higher: takeovers and breakups," Cramer said. "This stock gives you both."

"I'm talking about Agilent," the Mad Money host explained; a company that can largely be divided into four divisions—electronic measurement, life sciences, chemical analysis and diagnostics.

Scenario #1: Break-Up

"I see Agilent as a clear cut case where the parts are worth more than the company as a whole," Cramer explained.

The Mad Money host believes that Agilent's life science, chemical analysis and diagnostics divisions all deserve much higher valuation. However, he believes the Street is reluctant to award a higher valuation because the company's electronic and measurement division is a much more cyclical business. Therefore it's vulnerable to economic weakness.

"If Agilent were to split itself into two; 1) a cyclical electronic measurement play and 2) a secular growth oriented life sciences and diagnostics play, then I think the standalone life sciences business would really take off," Cramer said.

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The Mad Money host has crunched some numbers. Here's what he's come up with:

Looking at other deals in the same space, Cramer said Thermo Fisher agreed to pay four times sales in its acquisition of Life Technologies and Hologic agreed to pay six times sales for its acquisition of GenProbe.

"If you were to give Agilent's life science, chemical analysis and diagnostics the same price to sales multiple that Thermo Fisher is paying for Life Technologies, then you'd have a business that's worth $14.3 billion," Cramer said. "Agilent's current market cap is just $15.7 billion, so you're practically getting the more cyclical electronic measurement business for free."

Petrovich9 | E+ | Getty Images

Scenario #2: Takeover

"I think there's a second way to win here," Cramer said. I see strong takeover potential with one very obvious potential acquirer. Agilent might not be able to make all of its disparate divisions work well together, but I think Danaher, the giant, acquisitive conglomerate, could do it easily."

Cramer believes that everything done by Agilent would complement Danaher's businesses.

"Danaher also has a big test & measurement division, an even bigger life sciences and diagnostics segment, and an environmental group, too. In short, there's a place for everything that Agilent does within Danaher so there would be a lot of synergies."

How much would Agilent be worth on a takeover?

"Assuming the life sciences, chemical analysis and diagnostics side gets the same valuation as what Thermo Fisher paid for Life Technologies, that's worth $14.3 billion, and if the electronic and measurement division was valued similar to its peers, it would be worth $8.3 billion, so I could see Danaher paying as much as $22.6 billion for Agilent, or around $65 a share. That's a 43% premium to where the stock is trading right now."

Therefore Cramer is a buyer at current levels.

"You know I like prospective takeover targets and you know I like potential breakup plays. As far as I can tell, Agilent is both."

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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