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Kiss and break up

13 May 2015 By Kevin Allison

Danaher Chief Executive Tom Joyce’s breakup plan takes the sting out of his pricey bid for Pall. The $60 billion dentures-to-lasers concern is not cutting enough costs to justify the $13.8 billion it’s offering for the U.S. filter maker. But his surprise decision to voluntarily split Danaher in two dangles the prospect of better value for shareholders. The trick is to deliver.

Pall is an attractive company with good growth prospects. But Danaher is paying more than 18 times expected earnings before interest, taxes, depreciation and amortization, compared with the historical average of 15 times EBITDA for similar deals. Joyce reckons Danaher can siphon off $300 million of excess annual costs. Those are worth $2.2 billion to shareholders today, once taxed and capitalized – but that falls short of the almost $3 billion premium Danaher is stumping up.

On top of that, the “high single-digit” five-year return on investment Joyce expects to reap falls short of the company’s own 10 percent target on big acquisitions. Questioned about the discrepancy, Joyce said Pall was a “unique situation.” The filter maker certainly has scarcity value and a good business, but at present it’s not the best deal for Danaher shareholders.

Joyce’s plan to split Danaher into separate life sciences and industrial-focused companies could make up for the largesse. In theory, dividing Danaher’s sprawling portfolio into two smaller, more focused companies should lead to better decisions about where to put shareholders’ money to work. Separating the group’s faster-growing life sciences business from stodgier industrial products should also make Danaher easier for investors to value.

There are risks, however. Breakups can be expensive, disruptive affairs. And on 19 times forward earnings, Danaher’s shares already trade at an average 20 percent premium to other industrial conglomerates, according to Thomson Reuters data. So the valuation boost could be limited – by 1 p.m. Eastern on Wednesday Danaher shares were up just 2 percent.

There are more existential worries, too. Danaher grew to its current size by buying up smaller companies and running them better than the previous owners. To really deliver value, Joyce, who will run life sciences, and Jim Lico, who will take over the industrial business, will have to ensure that Danaher’s distinctive management culture doesn’t get lost in the shuffle.


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