By Bob Tita
Industrial conglomerate Danaher Corp. intends to break itself in
two next year, becoming the latest company to isolate units viewed
as having strong growth potential from cyclical, slower-growing
business lines.
As part of the breakup, Danaher will acquire
filtration-equipment maker Pall Corp. for $13.6 billion to fortify
a revamped business portfolio focused on science, health care and
technology markets.
Danaher plans to divest itself of its industrial units by
assembling them in a new public company that will be spun off to
Danaher shareholders in a tax-free transaction. The spinoff will
complete a shift under way at Danaher for the past few years to
exit old-line manufacturing businesses or businesses with little in
common.
Other diversified industrial companies that have sold or spun
off major business lines to shareholders in recent years include
Tyco International PLC, ITT Corp., Illinois Tool Works Inc.,
Johnson Controls Inc. and Ingersoll-Rand PLC.
While other conglomerates were pressured into realignments by
activist investors or slumping profit, Danaher has been among the
best-performing conglomerates year after year. With a
business-operating regimen focused on driving out costs and
expanding margins, Danaher has a reputation for effectively
steering through tough business conditions and quickly harvesting
the benefits from business acquisitions.
Danaher's annual sales grew at a compounded annual rate of 9.6%
from 2006 through 2014, compared with a 5.5% average for the
conglomerate sector, according to Barclays, which described the
company earlier this month as among the few "that consistently
screen at the top of most metrics." The company's annual operating
margin has topped its peers for eight straight years, with 17.2%
last year, compared with the sector average of 14.8%.
The new company carved out of Danaher will consist of its
testing and measurement equipment unit; the Gilbarco Veeder-Root
fuel-pumps business; automation gear and sensors; and Matco tools
for mechanics.
The businesses had combined revenue of about $6 billion in 2014,
though several of them are susceptible to sharp swings in demand,
and grew last year about 2%, according to analyst estimates.
The company, which hasn't yet been named, will be headed by
veteran Danaher executive James Lico, who is now executive vice
president in charge of the testing and measurement business and
fuel-pump line.
Danaher expects to complete the spinoff near the end of
2016.
Danaher's co-founders--Chairman Steven Rales and his brother
Mitchell Rales, a Danaher director--will serve on the board of the
new company. Meanwhile, Thomas Joyce will remain as chief executive
of Danaher, which is based in Washington, D.C.
"Danaher will be a more focused science and technology growth
company, united by common business models and attractive
characteristics," Mr. Joyce said during a conference call Wednesday
with analysts. "Our large installed base of instruments is expected
to generate a stable and sustainable revenue stream."
Going forward Danaher's portfolio will consist of its
life-sciences businesses and diagnostics businesses, which includes
Beckman Coulter, a medical-diagnostic-equipment maker;
product-identification gear; dental appliances; water-treatment
equipment; and Pall.
The businesses had combined revenue last year of $16.5 billion,
estimated at about 5% above 2013. More than two-thirds of the
revenue came from replacement parts and sales of consumable items,
such as testing kits made by Beckman Coulter, that customers use
regularly. Mr. Joyce said Pall will be a good fit for the revamped
lineup.
The Port Washington, N.Y.-based company sells purification and
filtration equipment for water and other liquids to
biopharmaceutical companies, airplane manufacturers, brewers and
municipal water systems.
About half of Pall's $2.8 billion of revenue last year came from
its life-sciences business where about 60% of the sales were
derived from the biopharmaceutical industry, which produces drugs,
vaccines and other treatments from biological sources, rather than
chemicals.
Pall's industrial business unit generated $1.3 billion of
revenue last year. Municipal water systems and other process
industries, such as chemical manufacturing, accounted for about
two-thirds of the unit's revenue.
"Pall has been run well," said Richard Eastman, an analyst for
Robert W. Baird in Milwaukee. "It has a great business portfolio
and a great market position."
Danaher will pay Pall shareholders $127.20 in cash for each of
their shares, about a 28% premium over the closing price of Pall's
stock on Monday. That was before The Wall Street Journal first
reported Monday evening that Pall was in discussions with suitors
including Danaher.
The purchase of Pall is Danaher's largest acquisition to date,
surpassing the purchase of Beckman Coulter in 2011 for $5.9
billion.
As Danaher devoted more resources to large-size acquisitions of
science and technology companies, Mr. Joyce said the industrial
units have become increasingly deprived of investment. By launching
these businesses into a separate company, Mr. Joyce predicted they
will be better able to pursue acquisitions and raise capital.
"A focused, coherent straightforward structure [will] allow them
to focus on their end-markets and have renewed license to do
mergers and acquisitions," he said.
Danaher's shares gained 1.6%, or $1.35, to $87.35 on Wednesday.
The shares have risen 18% in the past 12 months.
Write to Bob Tita at robert.tita@wsj.com
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