May 12--Industrial waterjet maker Flow International of Kent has called off its proposed merger with smaller rival Omax, also of Kent.

Omax will receive a $35 million payment from Flow, both to cancel the merger obligation and also to settle patent litigation that has been pending between the two companies for five years.

In 2007, publicly traded Flow offered $109 million in cash and stock for privately held Omax, but after the economy sagged Flow last year reduced the offer to $75 million. In March it amended the terms again to allow the option of walking away after the termination payment.

"We believe that our path forward alone is far superior to one combined with Omax at the wrong price," Flow chief executive Charley Brownsaid Tuesday in a conference call with investors.

John Olsen, co-founder of Omax and now vice president of operations, said the outcome is "very good news for Omax employees."

"Had the merger gone ahead, with the current financial situation, there would almost certainly have been layoffs in the joint company," Olsen said.

Flow, the world's largest waterjet maker, has about 670 employees worldwide with about 330 of those in Kent.

Omax, the second largest waterjet manufacturer in the U.S. market, employs about 180 people worldwide, with about 160 in Kent.

With the merger proposal killed, Olsen said the big cash infusion leaves Omax in a strong position to develop new technology for its waterjets during the current slow period.

"Had the merger happened when everything was going well in the economy, we would have been happy to join forces," said Olsen, "This way, we're also happy."

Brown said that in the past two months the company has pursued financing alternatives to close the merger and has "repeatedly gone back to the negotiating table attempting to lower the price of the deal."

But Omax "was unwilling to move on the price, and financing alternatives at the existing price have proven to be way too dilutive to our current shareholders, so we have decided to walk away," Brown said.

Flow develops and manufactures industrial waterjets. Small amounts of abrasive particles mixed into a thin jet stream of water are used to cut metal, plastic, stone and glass.

Mitsubishi in Japan uses Flow waterjets to cut the carbon-fiber composite plastic for the wings of Boeing's 787 Dreamliner. And Flow will also supply waterjets to Airbus to cut parts for its composite plastic jet, the upcoming A350.

Both Flow and Omax are waterjet pioneers and hold key engineering patents. Omax was founded in 1993 by Olsen and fellow engineer John Cheung, both of whom were involved with early waterjet-technology companies that eventually became part of Flow.

In 2004 Omax sued Flow, alleging infringement of its patents on software that controls the waterjet and seeking damages of more than $100 million. Flow countersued over its own patent.

Of the agreed Flow payment to Omax, $29 million is allocated to settle that litigation. The additional $6 million is compensation for ending the merger talks.

Brown said Flow had been interested in acquiring Omax largely to acquire its U.S. network of distributors to machine tool shops.

Instead, he said Tuesday, Flow has in recent months signed a significant number of new distributors by taking over the network of the third largest waterjet company in the U.S., Texas-based Calypso, which went out of business in January.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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