Tech Industry

Agilent prepares for massive IPO

Agilent Technologies, a former HP division that has been spun into a separate company, plans to raise $100 million in an initial public offering.

Hewlett-Packard is preparing to turn one of Silicon Valley's oldest businesses into the next hot startup by taking its newly re-christened test and measurement equipment unit public.

Agilent Technologies, a former HP division that has been spun into a separate company, plans to raise $100 million in an initial public offering, according to documents filed today with federal regulators.

The company, which will also gain control over a substantial portion of HP's research arm, HP Labs, specializes in precise measurement equipment used by scientists, medical researchers, and others. Already pulling in $8 billion in revenue, Agilent will effectively become one of the largest companies ever to go public.

The company didn't disclose how many shares it expects to offer or a proposed price range for the stock, although those details are expected later.

The IPO filing is the latest step in HP's ongoing restructuring, under which the 61-year-old company is splitting into two companies, one focusing on personal computers, printers, and scanners, and Agilent targeting the test and measurement equipment market with a focus on telecommunications and life sciences. As part of the major reorganization, announced in March, HP last month tapped former Lucent Technologies executive Carleton Fiorina to serve as its new president and chief executive.

HP plans to complete its divestiture of Agilent by mid-2000 by distributing its entire stake in the company to HP common stock shareholders, according to the Securities and Exchange Commission filing. The majority of those shares would be eligible for immediate resale in the public market.

HP, which was founded in 1938 and went public in 1957, expects to make a cash payment to Agilent in November in connection with the planned initial funding.

The net proceeds of the offering will be paid to Hewlett-Packard as a dividend, Agilent said in SEC documents. Agilent also intends to fund its growth with future earnings rather than issuing dividends to shareholders.

Under the leadership of chief executive Edward "Ned" Barnholt, Agilent makes testing, measurement, and monitoring instruments in addition to some semiconductors and fiber optic network components. Agilent essentially represents what was HP's core business for three decades--products such as audio oscillators, scientific calculators, and chemical analysis tools.

With $8 billion in revenue in the company's fiscal 1998 year, Agilent is hardly a typical start-up company going public. The company has 43,000 employees, does business in more than 100 countries, and will be among the Fortune 200 when after it goes public, Barnholt said in a recent interview.

On that level, the spin-off can be said to be similar to the situation when AT&T spun off its touted laboratories into a separate company. AT&T labs became Lucent.

For the six months ended April 30, Agilent reported net income of $231 million on nearly $3.8 billion in revenue. Agilent's balance sheet showed $913 million in cash on a pro-forma basis at the end of April and total assets of $5.4 billion, according to the filing.

The 55-year-old Barnholt will earn a base salary of nearly $760,000 for his Agilent leadership, according to the 621-page IPO filing. Barnholt also beneficially owns 345,000 shares of HP stock.

Agilent sees growth opportunities in the high-speed networking and wireless communications businesses, according to the IPO filing.

Agilent will have a wide product line, including chips to run fiber optic network components, testing equipment for wireless networks, heart monitors for use in hospitals, and instruments to analyze chemical compounds.

"Having all these technologies under one roof gives us more opportunity than if we were single-dimensional," Barnholt said.

While the product mix is varied, the markets to which Agilent will sell its products are similar, Barnholt said. For example, customers for the technology rely heavily on research and development, often buy equipment directly from the producer, and demand a broad mix of equipment that typically doesn't ship in high quantity--often leading to higher profit margins.

The company expects to have a "sharper focus" as a separate entity, with the advantage of greater access to the capital markets to issue debt or equity securities, and an ability to react more quickly to changing market dynamics. Agilent's name is intended as an offshoot of "agile."

"We're seeing it as a coming out from under the shadow," Barnholt said, saying it will be easier for the company to get financial research analysts to pay close attention to the company. "We'll get the benefits around speed, urgency, and focus that smaller companies get with their stock."

But, at the same time, Agilent warned in its IPO filing that it will not have the same large-scale purchasing power it once had under HP.

Agilent also outlined international exposure as one of its investors' key risk factors. The test and measurement unit, which was hit hard in 1998 by the so-called Asian flu, has derived more than 50 percent of its revenue outside the United States over the past 18 months, Agilent said in the documents. Agilent is particularly exposed to Korea and Japan.

Revenue from the test and measurement business decreased nearly 14 percent in the first half of 1999 compared to the first half of 1998, primarily due to the economic conditions in Asia and the downturn in the semiconductor industry. Agilent said. However, Agilent said it has recently seen strong demand for its products in the pharmaceutical industry.

In addition, Agilent said its semiconductor technology licensing and supply arrangements with HP could limit its ability to sell chips to other companies, thereby restricting its ability to expand its chip business.

The two companies won't entirely part ways, however.

Though Agilent will retain HP's traditional light blue color in its logo and the tagline "innovating the HP way," Agilent otherwise will hand over the HP name to the computing and imaging business. "My reaction initially was a certain amount of sadness around the loss of the HP name," Barnholt said.

The Agilent IPO is being underwritten by investment banks Morgan Stanley Dean Witter and Goldman Sachs and is expected to trade on either the New York Stock Exchange or the Nasdaq stock market. The company did not disclose a proposed ticker symbol.