June 29 (Bloomberg) -- Siemens AG, Europe's largest engineering company, will buy the diagnostic division of Bayer AG for 4.2 billion euros ($5.31 billion) to expand the company's most profitable business, its medical unit.

Bayer, the developer of aspirin, expects net proceeds of 3.6 billion euros from the sale, the Leverkusen, Germany-based health care company said in a statement to the Frankfurt exchange. The transaction is expected to close in the first half of 2007.

The purchase adds to the more than 5 billion euros Munich- based Siemens has spent in the past six years to expand its medical division. Siemens Chief Executive Officer Klaus Kleinfeld is battling with rivals Royal Philips Electronics NV of the Netherlands and Fairfield, Connecticut-based General Electric Co. for a share of the world medical technology market.

``Siemens is obviously trying to build up its medical portfolio as quickly as possible with rapid-fire acquisitions,'' said Ben Uglow, a London-based analyst at Morgan Stanley, who rates Siemens overweight. The purchase ``isn't by any means cheap,'' he said.

Siemens is making the Bayer purchase less than two weeks after the company announced plans to dissolve its telecommunications division by forming a joint venture with Nokia Oyj of Finland. Siemens is realigning the company to focus on medical technology, transportation, automation and energy.

Increased Demand

``Demographic change is greatly increasing global demand for health-care services and thereby generating excellent growth opportunities for Siemens,'' Chief Executive Officer Klaus Kleinfeld said in an e-mailed statement.

``The acquisition of Bayer Diagnostics is part of our targeted strategy to create the health-care industry's first integrated diagnostics company by combining the entire imaging diagnostics, laboratory diagnostics and clinical IT value chain under one roof,'' Kleinfeld said.

The purchase is the biggest yet under Kleinfeld, who became CEO in January 2005, and the second-biggest in the company's 159- year history. The only bigger purchase for Siemens was the acquisition in 2000 of the Atecs engineering and auto-parts unit, for more than 6 billion euros.

Bayer shares climbed 1.06 euros, or 3.2 percent, to 34.38 euros in Frankfurt today. The stock has increased 24 percent in the past year. Siemens shares added 1.55 euros, or 2.4 percent, to 67.50 euros. The stock has advanced 11 percent in the past 12 months.

Shares of GE rose 34 cents, or 1 percent, to $33.27, in New York Stock Exchange composite trading.

Medical Division

Amsterdam-based Philips on June 15 said it agreed to buy New York-based Intermagnetics General Corp. for about $1.3 billion in cash to add a maker of components used in magnetic resonance imaging scanners. Philips's Chief Executive Officer Gerard Kleisterlee has said he is buying medical companies to move away from businesses that are sensitive to economic swings, such as its semiconductor operations.

Two months ago Siemens announced the purchase of Diagnostic Products Corp. for about $1.86 billion in cash to bolster its medical division. Diagnostic Products makes test kits to detect diseases such as cancer and allergies.

Siemens products range from power plants to medical scanners to traffic lights and phone networks.

Bayer is buying German rival Schering AG for 17 billion euros to expand its health-care operations, and is concentrating on medicines for humans and animals, as well as over-the-counter products. The drugmaker said it will cut 6,000 jobs and trim production costs to spur growth at the newly combined company.

Bond Sale

Bayer won the bid after Merck KGaA forced Bayer to up its price by three euros a share by buying shares on the market. In March, Merck had stepped back from its own bid after being trumped by Bayer's 86-euro-a-share bid.

Divesting the diagnostic business to Siemens means that Bayer may cancel or reduce the size of a bond sale the company had planned to help fund the purchase of Schering, Bayer said. Bayer will also reduce by 500 million euros its plan to raise 4 billion euros in equity, the company said.

The spread on Bayer bonds narrowed. The extra yield investors demand to hold Bayer's 6 percent euro-denominated bond due in 2012 instead of government bond narrowed to 73.0 basis points, according to RBC Capital. This is more than the 68 basis points the spread hit when Standard & Poor's put the company on credit watch for downgrade on March 24 of this year.

Bayer said it plans to retain the health diagnostics business it is getting in its acquisition of Berlin-based Schering.

Diagnostics Businesses

``This doesn't mean anything for the Schering diagnostics unit,'' Bayer spokesman Guenter Forneck said in a telephone interview. Forneck said the Bayer unit is of a ``technical nature,'' while Schering's diagnostics are closer to the medical business.

Bayer said the decision to divest the unit, a maker of machines that analyze patients' blood or urine samples automatically, wasn't being undertaken to help finance the Schering purchase.

``The systems business of the Diagnostics Division, with its emphasis on hardware, IT networking and comprehensive equipment service, is subject to different success factors than the other Bayer HealthCare divisions,'' Bayer said in the statement.

Siemens spokesman Wolfram Trost said the company will hold a press conference in Munich tomorrow at 10 a.m. local time to provide details on the acquisition.

Separately, Bayer announced the supervisory board extended Chief Executive Officer Werner Wenning's contract until 2010 and Chief Financial Officer Klaus Kuehn's contract until 2012.

To contact the reporters on this story: Benedikt Kammel in Berlin at bkammel@bloomberg.net; Eva von Schaper in Munich at evonschaper@bloomberg.net.

Last Updated: June 29, 2006 18:34 EDT