Water purification is being targeted as a high-growth market by other companies, including General Electric Co. (GE) The global liquid and air filtration market is larger than $30 billion and growing more than 8 percent a year, 3M said.
"The size of the opportunity here is huge," 3M Chairman and Chief Executive W. James McNerney said on a conference call.
3M (search) plans to pay $72 a share in cash for CUNO (search), a 31 percent premium from its closing price on Wednesday, and assume $60 million of existing net debt. 3M had $2.7 billion in cash and equivalents at the end of March.
3M's shares were off slightly in afternoon trading on the New York Stock Exchange, while CUNO's surged more than 29 percent to hit an all-time high on the Nasdaq. The news also boosted shares of other filtration companies on takeover speculation, including Pall Corp. (PLL), up 8.3 percent, and Pentair Inc. (PNR), up 4.5 percent.
Analysts said filtration, especially for water, is a hot growth area.
"The smart money out there is saying this is a growth business and they're going after it," Morningstar analyst Scott Burns said. "You can't make good steel with water that has a lot of crud in it or cool nuclear power plants with water with contaminants.
"Water is a key raw material for a lot of these processes and something we take for granted in the Western world."
In February, GE bought Ionics Inc. (search) for $1.1 billion, while water-treatment company Nalco Holding Co. (NLC) listed its shares in an initial public offering last November. ITT Industries Inc. (ITT) is another big player in the sector.
3M's current filtration business, mostly in air filtration, totals more than $1.1 billion, and this deal will add another $400 million. CUNO, whose products remove contaminants that range in size from molecules to sand particles, gets about half its sales from the water segment, with the rest coming from health care and fluid processing.
CUNO's annual growth rate from 1994 to 2005 is 10 percent for sales and 29 percent for earnings per share.
St. Paul, Minnesota-based 3M will leverage its 37,000 employees outside the United States to boost demand for CUNO's products globally, executives said. For instance, 3M has 2,000 employees in China, while CUNO only has about 20.
"As you travel through China, the first thing you see when you walk into a hotel is a sign that says, 'Please do not drink the water.' It's a great opportunity," said CUNO CEO Mark Kachur, who will remain with 3M after the deal closes.
3M will try to cut CUNO's costs 4 percent to 5 percent — starting at about $20 million — through the elimination of facilities and other moves, executives said. Connecticut-based CUNO, which will operate as a stand-alone operation within 3M's industrial business, employs 2,300 people.
Known for its Scotch tape, Post-It notes, medical products and optical films, 3M said it plans to fund the acquisition with existing cash. The deal should add to earnings in 2006 and does not change its earnings-per-share guidance for 2005.
On Tuesday, 3M reiterated it expected to earn $4.15 to $4.25 a share this year. Analysts expect it to earn $4.23 a share, according to Reuters Estimates.
The deal should close early in the third quarter and 3M's McNerney did not rule out other deals in the future.
Shares of CUNO surged $15.93, or 29.1 percent, to $70.75, while 3M shares were down 86 cents, or 1.1 percent, at $76.13 in afternoon trading.