Merck KGaA's agreed $6 billion cash purchase of U.S. biotech tool maker Millipore buoyed the German drugmaker's share on Monday as it diversified away from its embattled pharmaceuticals business.

Merck, which makes the multiple sclerosis drug Rebif and owns the rights to cancer drug Erbitux in Europe, agreed on Sunday to buy Millipore in a deal that boosts its lab equipment business.

It last year failed to win regulatory approval for the use of its blockbuster-hopeful Erbitux against lung tumours, the most common form of cancer, and the prospects for U.S. approval of its experimental multiple sclerosis pill are uncertain.

Its main cash cow, the liquid crystals unit - the world's largest maker of chemicals for TV flat screens - has seen a gradual slide in operating margins from about 50% percent for much of 2008 as Asian rivals emulate Merck's technology.

"The transaction likely makes sense in the long term as investors increasingly worry about the prospects for the liquid crystals division," Jefferies analyst Jeffrey Holford said.

"Management will at least be able to focus investor attention away from recent disappointments (related to its drug pipeline)," he added.

The deal is set to snatch Millipore away from rival bidder Thermo Fisher. A source familiar with the situation told Reuters on Feb. 22 Thermo Fisher offered to buy Millipore for $6 billion, but the exact terms of that bid were unknown.

Merck stock recouped losses of as much as 1.6% in early trade, when concern over the takeover price prevailed.

"The transaction looks rather expensive to us," said Equinet analyst Martin Possienke in a note to clients. "It is still uncertain whether all Millipore shareholders will accept the takeover bid," he added.

Millipore's Frankfurt-listed shares traded at the equivalent of $106.7, just shy of Merck's per-share bid. Thermo Fisher's shares were little changed in Frankfurt.

Merck's bid represents a 13% premium over Friday's closing price for Millipore shares, but it is 50% above the close on Feb. 19, the trading session before Reuters reported Thermo Fisher had placed a bid.

It will fund the deal with bridge loans before refinancing via a bond issue. Millipore had confirmed on Tuesday it was evaluating strategic alternatives, including a merger or sale of the company.

Step To Diversify

Merck said on Sunday it agreed to pay $107 per share in cash, valuing the deal at around $7.2 billion including debt.

"Today, it's a step to diversify," Merck Chief Executive Karl-Ludwig Kley told journalists in a briefing. "I don't rule out that at some point the business models of life science materials business and the pharma business will converge but that could be 10 years or more, that's not what drove this deal."

Merck will pay 15.1 times Millipore's estimated 2010 earnings before interest, taxes, depreciation and amortization (Ebitda), and the deal will immediately increase Merck's earnings per share excluding one-off items, Kley added.

Millipore, which makes filters and purifiers for laboratory water and other materials used in making biotechnology drugs, had revenue of $1.65 billion last year.

Family-controlled Merck, which traces its roots to a 17th century pharmacy, has been a smaller player in the biotech-research equipment market.

In 2006, Merck was trumped by national rival Bayer in a takeover battle over German contraceptives specialist Schering, but the following year it acquired Swiss company Serono, for €10.3 billion, making it Europe's largest biopharmaceuticals company.