Danaher’s $12 Billion Deal Engine Is Idling: Real M&A

Danaher Corp. (DHR) investors are antsy for the industrial conglomerate to make a big acquisition.

The company hasn’t done a deal of at least $500 million since 2012, its longest drought in 11 years, according to data compiled by Bloomberg. That’s contributed to the worst start to a year since 2008 for Danaher stock, as annual sales also expanded at the slowest pace since 2009. Investors are holding off on buying Danaher shares until the $56 billion company, known for its dealmaking, gets back in the game with a transaction big enough to spark some growth, said Longbow Research.

It’s not that Danaher doesn’t have resources for a takeover: Chief Financial Officer Daniel Comas suggested last month it may have as much as $12 billion for a deal. Yet private-equity suitors have nabbed targets such as Ashland Inc.’s water unit out from under Danaher, and the company says the surge in equity markets has made other possibilities too expensive. While Janney Montgomery Scott LLC said the company may consider Agilent (A) Technologies Inc.’s life sciences business, Citigroup Inc. said it also could consider a breakup instead.

Investors are “definitely ready to see deals,” Mark Douglass, an Independence, Ohio-based analyst at Longbow, said in a phone interview. “They’re not the only ones in this boat, but they probably have more pressure than others given their size and ability.”

Photographer: Jeffrey J. Nenarel/Danaher Corp. via Bloomberg

Danaher Chief Executive Officer Larry Culp said last July that the company had the ability to spend more than $8 billion on acquisitions. Close

Danaher Chief Executive Officer Larry Culp said last July that the company had the... Read More

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Photographer: Jeffrey J. Nenarel/Danaher Corp. via Bloomberg

Danaher Chief Executive Officer Larry Culp said last July that the company had the ability to spend more than $8 billion on acquisitions.

Representatives for Washington-based Danaher, didn’t respond to requests for comment.

Rising Capacity

Danaher Chief Executive Officer Larry Culp said last July that the company had the ability to spend more than $8 billion on acquisitions. Almost a year later, it has yet to do a sizable deal and management has indicated that takeover capacity has increased to about $12 billion, according to Citigroup.

The maker of everything from dental equipment to water filters already had a record amount of cash on its balance sheet last June, and its hoard has grown another 44 percent to $3.3 billion as of the end of March, according to data compiled by Bloomberg.

With those kinds of resources, the pressure is on to find a deal, according to Paul Knight of Janney, who said Danaher’s potential firepower could be even bigger than $12 billion.

“They’ve got plenty of balance sheet to buy a wide variety of firms,” Knight, a New York-based analyst, said in a phone interview. “People have been surprised at how long it’s taken.”

Last Deal

It’s been more than two years since Danaher last announced an acquisition of at least $500 million. That’s the company’s longest stretch without a deal of that size since it agreed to buy Radiometer A/S in 2003, data compiled by Bloomberg show.

While Danaher has made attempts at takeovers recently, it has yet to be successful. In the past year, the company has teamed up with Blackstone Group LP to bid on Johnson & Johnson’s Ortho Clinical Diagnostics unit and Ashland’s water chemicals operations, people familiar with the matter have said. Both deals ended up going to buyout firms.

“It’s clear that private equity -- chasing after deals with as much money as private equity has, with the debt being so cheap -- is definitely affecting people’s ability to get stuff done,” Douglass of Longbow said.

Chasing Targets

Higher equity valuations have also made the pursuit of takeover targets pricier. The Standard & Poor’s 500 Index closed at a record yesterday, pushing its earnings multiple to the highest level since 2010, data compiled by Bloomberg show.

“A year ago, we certainly were in conversation with folks that we thought we had a strong chance of bringing into Danaher,” CEO Culp said during a March presentation. “But as the public markets rose through the course of last year, some of the situations just got out of reach. It doesn’t mean we wouldn’t love to have them in the company, but we’re not going to chase that thing to the end of the earth.”

Culp is stepping down next March, putting the company in a transition period that could impede its ability to purse large transactions.

There are possible takeover targets for Danaher. Those include Agilent’s life sciences business, according to Deane Dray of Citigroup. Agilent said in September that it would split into two public companies, with one business focused on life sciences, diagnostics and applied markets and the other on electronic measurement products.

Remaining Possibilities

Other options are PerkinElmer Inc. (PKI), a $5.3 billion company, or an international target such as U.K.-based Oxford Instruments Plc (OXIG), a producer of X-ray tubes and spectrometers, Knight of Janney said.

A representative for Santa Clara, California-based Agilent declined to comment. Representatives for Waltham, Massachusetts-based PerkinElmer and Oxford Instruments didn’t respond to requests for comment.

Shares of Danaher dropped 0.7 percent to $80.10 today. Agilent stock slipped 1.1 percent to $58.62 and PerkinElmer declined 0.4 percent to $46.82, while Oxford Instruments was unchanged.

With no deal in sight, Danaher’s stock price has been constrained, said Jeff Windau, a St. Louis-based analyst at Edward Jones & Co. The 4.5 percent rise so far this year compares with a 5.9 percent gain for the S&P 500. (SPX)

“Investors are just waiting a little bit to see what the acquisitions will be and see when they’re going to be able to pull the trigger on something,” Windau said in a phone interview.

Breaking Up

Even though the company has said it spent about $1 billion on several small deals last year, “the perception is those are not moving the needle in terms of their earnings accretion,” said Dray, a New York-based analyst at Citigroup.

That’s fueling questions about whether Danaher should consider breaking itself up, he said, estimating the company could be valued at about $90 a share, a 12 percent premium to yesterday’s close, if it was split up. That’s before accounting for any further upside, such as from additional leverage.

The tipping point for splitting the industrial conglomerate into “baby Danahers” may be if the company doesn’t make an acquisition this year, the analyst said.

“The longer the dry spell persists those questions will persist,” Dray said. “The stock price is going to be one of the other measures. If it sits toward the low end of its range, you’ll see more investor discontent.”

Dividend Projection

Another possibility for Danaher if it doesn’t do a deal is to increase its dividend or buy back shares. Danaher is projected to have the second-biggest dividend increase, in percentage terms, over the next three years among S&P 500 companies, according to Bloomberg dividend analysts.

Matthew Moore, of Calvert Investments Inc., said that although he wants to see a deal, he’s willing to give the company’s management team more time. If an acquisition isn’t announced within a year though, “it’s a different conversation,” the fund manager said.

“These guys are pretty picky and pretty smart,” Moore, whose Bethesda, Maryland-based firm oversees about $13 billion including shares of Danaher, said in a phone interview. Even so, “you’re definitely hearing the Street getting antsy.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Whitney Kisling

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