Bloomberg News

Danaher’s $8 Billion Seen Fueling Bid for Spectris: Real M&A

September 10, 2013

Danaher Corp. (DHR:US), a maker of everything from dental equipment to water filters, may spend some of its more than $8 billion in takeover firepower on Pall Corp. or Spectris Plc (SXS) to help boost sales amid the slowest growth in four years.

Chief Executive Officer Larry Culp said in July that the $47 billion company is looking for deals that can increase returns for shareholders. Spectris, a $4.3 billion maker of testing gear, could lure Danaher with its high margins and the opportunity for cost cutting, said Credit Suisse Group AG. Pall, an $8.1 billion supplier of water-filtration technology, could be an attractive target, FBR & Co. and Longbow Research said.

Danaher hasn’t spent more than $1 billion on a purchase (DHR:US) since 2011, and now has a record amount of cash for takeovers. Macquarie Group Ltd. said investors are eager for more dealmaking, with the Washington-based company’s sales poised to increase by less than 4 percent this year, down from growth of more than 12 percent every year since 2009, according to data (DHR:US) compiled by Bloomberg.

“Larry has made it pretty clear that he has that firepower,” Ajay Kejriwal, a New York-based analyst at FBR, said in a phone interview. “Given their track record, investors know that they will do something. It’s just a matter of time.”

A representative for Danaher said the company declined to comment.

Acquisition Strategy

Danaher’s business is divided into five units (DHR:US): dental; test and measurement; environmental; life sciences and diagnostics; and industrial technologies. The company, which pays a quarterly dividend of just 2.5 cents a share, has historically rewarded shareholders by making acquisitions that fuel growth.

The company’s market value has surged more than four-fold in the last decade as it completed about 68 takeovers. While Danaher has already announced five deals this year, it hasn’t spent more than $1 billion on a transaction since the purchase of Beckman Coulter Inc. for about $7 billion in 2011, data compiled by Bloomberg show.

“This is a company that again and again has shown that via M&A it can create a ton of value,” Ross Muken, a New York-based analyst at International Strategy & Investment Group LLC, said in a phone interview. Danaher is “overdue” for a transaction.

Analysts estimate the company will boost sales (DHR:US) 3.8 percent this year to $19 billion, the slowest growth since 2009.

Cash Advantage

Danaher had a record $2.3 billion in cash (DHR:US) as of June, according to data compiled by Bloomberg that goes back to 1987.

“The great advantage that Danaher has is that balance sheet, and so people would like them to put it to use,” Jonathan Groberg, a New York-based analyst at Macquarie, said in a phone interview. Without deals, “you’re left with a low-growth business.”

Danaher has the capability to do more than $8 billion in deals through 2014, Culp said on the company’s second-quarter earnings call in July.

“We’re looking for great fits where we can add value, where we can generate a return for our shareholders,” the CEO said. The company is having “high-quality conversations with high-quality companies.”

Pall (PLL:US), whose CEO Larry Kingsley is a former Danaher executive, has attractive margins and would be a “good strategic fit” within the conglomerate’s environmental-technologies division, said Kejriwal of FBR.

Revenue Stream

Danaher could also be attracted to Pall’s steady revenue stream from installing and replacing filtration devices, according to Mark Douglass, an Independence, Ohio-based analyst at Longbow. Pall had sales of $2.6 billion in its latest fiscal year.

A deal “would definitely make sense,” Douglass said in a phone interview. Pall employees (PLL:US) “would have already been introduced to at least some of the practices of the Danaher business system with an ex-Danaher manager at the helm.”

Pall’s valuation could be a deterrent to a deal, said Douglass and David Rose, a Los Angeles-based analyst at Wedbush Inc. The company’s market value has surged more than 70 percent since Kingsley took over as CEO in October 2011.

Spectris would be a more digestible target for Danaher, which would be drawn to its high margins, steady revenue and the potential for consolidation within the conglomerate’s own test and measurement division, according to Julian Mitchell, a New York-based analyst at Credit Suisse. Spectris generated revenue of $1.95 billion in 2012.

‘Right Wheelhouse’

“You look at their market cap, it’s in the right wheelhouse,” Mitchell said in a phone interview. “There’s scope for someone with a very good operating system like the Danaher business system to come in there and take out costs by centralizing the supply chain, the sales forces.”

Doug Novarro, a spokesman for Port Washington, New York-based Pall, didn’t return phone or e-mail messages requesting comment, while Clea Rosenfeld, head of corporate affairs at Egham, England-based Spectris, declined to comment on the potential for a deal with Danaher.

Today, Pall shares climbed 2.1 percent to $73.69 at 10:40 a.m. New York time, headed for an all-time closing high. Spectris rose 0.5 percent to 2,327 pence.

Danaher could seek acquisitions to bulk up its product-identification business, which makes printing and coding equipment, according to Muken of ISI. The operations are part of Danaher’s industrial technologies division.

“There’s still lots of companies available” for takeovers, Muken said. “You’ve got this mix of attractive market growth, no installed leader of size.”

Danaher also could pursue transactions in the life sciences and diagnostics industry, which last year accounted for 36 percent of its revenue, according to Brandon Couillard, a New York-based analyst at Jefferies Group LLC.

After Life

The company explored a purchase of Life Technologies Corp. (LIFE:US), according to people familiar with the matter who asked not to be named because the process was private. Life agreed in April to sell itself to Thermo Fisher Scientific Inc. for about $16 billion, including debt.

Danaher “would like to do more in that area,” Couillard said in a phone interview. “It has long viewed Thermo as a competing bidder for every asset of interest in the space and with them currently tied up with Life, it does give Danaher some advantage in the negotiation process.”

Danaher is a disciplined buyer and with equity markets near record highs, the surging valuations of many potential targets have made dealmaking challenging, according to Nigel Frankson, a Baltimore-based analyst at Brown Advisory Inc., which owns Danaher stock among its holdings.

Buy, Fix

“The current environment is probably unfavorable for them,” Frankson said in a phone interview. “As a shareholder of Danaher, I appreciate them not buying something just for the sake of buying something.”

At the same time, Danaher’s specialty is buying companies and applying its management system to boost profitability, he said.

“Danaher can buy a company and fix it and it will be more valuable tomorrow than it is the day they bought it,” Frankson said. “That’s what I want Danaher to do. The value accrued to the shareholder is clear and obvious.”

To contact the reporters on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net; Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • DHR
    (Danaher Corp)
    • $76.33 USD
    • -0.32
    • -0.42%
  • PLL
    (Pall Corp)
    • $83.43 USD
    • 2.71
    • 3.25%
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