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Smiths takes the detection route

The engineer’s new chief executive has delivered on his pledge to invest in identified growth areas by acquiring Morpho Detection for nearly £500m
April 22, 2016

The strategy has changed at Smiths Group (SMIN) and investors don’t seem to mind one bit. After years of pleading for the break-up of what was viewed as a sprawling mess of mismatched operations, a new management team determined to invest in current technologies was installed. The $710m (£495m) purchase of Safran’s (FR:SAF) US detection and security business Morpho solidified these intentions, marking Smith’s first sizeable acquisition in years and a 4 per cent jump in the engineer’s share price.

IC TIP: Buy at 1155p

This positive reaction is unsurprising given the quality of the company being bought. Morpho is less dependent on new project work than Smith’s detection business, and generates an operating margin 6.2 percentage points higher than its new partner. With the two units set to be combined, investors can expect plenty of synergies and a powerful presence in an industry that looks destined to grow.

Not too long ago, Smith’s detection arm was the source of much contention among shareholders, as the cash-strapped US government ended its obsession with installing scanners at airports. However, following a surge of high profile terror attacks, the protection of important buildings has re-emerged as a pressing priority.