Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

How to operate an industrial conglomerate: Step one, copy whatever Danaher is doing. Step two, repeat.

Winning
Danaher jumped after announcing earnings that beat estimates.
Source: Bloomberg
Intraday times are displayed in ET.

The $66 billion maker of everything from dental equipment to water-filtration technology (with one of the lesser-known names outside its circles) increased its 2016 profit guidance on Thursday after surpassing analysts' first-quarter estimates for earnings per share, revenue, margins -- essentially everything. The stock climbed as much as 2.7 percent in response, at one point touching the highest price in Danaher's more than 30 years as a public company. 

The downside to all this success is that investors always want more, but for now, let's let's give Danaher its due.  

Out in Front
Danaher rarely misses earnings estimates and often gains on the day of announcement.
Source: Bloomberg

The company has proved itself to be pretty dependable: It has beat earnings estimates all but seven times over the last 43 quarters. This latest earnings beat stands out: It's Danaher's biggest positive surprise since 2011 and comes at a time when most industrial companies are struggling under the weight of the sluggish global economy and weak commodity prices. Just look at Dover Corp., which missed estimates when it reported first-quarter earnings on Thursday and had to reduce its 2016 guidance (the stock fell).  

So what's Danaher's secret sauce? For one, it's less exposed to energy markets than a company like Dover, which makes pumps and artificial lifts. That didn't hurt. But Danaher has also done all the things an industrial conglomerate is supposed to do when growth is sputtering: Control costs, make acquisitions and when necessary, become less of a conglomerate, or even less of an industrial-focused company in Danaher's case. That's a playbook others should take note of.

Danaher last year closed on its $14 billion purchase of life-science equipment company Pall Corp., its biggest deal ever and an answer to investors' growing calls to put its cash to work on growth-boosting M&A. Pall didn't come cheap, but Danaher has proven it knew what it was doing when it paid up for the deal. Cost cuts tied to the transaction are ahead of schedule, with more than $100 million of benefits expected this year. The biopharmaceutical businesses
acquired through Pall were some of the fastest-growing at Danaher and helped counteract challenges on the industrial side of things.

Soon that division will be able to shine through even stronger. Danaher has a plan to essentially transform itself into more of a life-sciences company by jettisoning operations with a more industrial bent (and weaker growth prospects) such as the Fluke and Tektronix test and measurement units. The split, which is set to be completed in the third quarter, is looking smarter and smarter by the day. 

brook-danaher

The other big goal of the split is to make it easier for Danaher to find meaningful acquisitions that could help increase earnings. To keep the good times going, it will have to deliver on that front. Danaher is still paying down debt from the Pall purchase, but it stands to get a roughly $3 billion dividend from its industrial spinoff (dubbed Fortive). Smaller deals may be more Danaher's speed for a while, but eventual targets could include the likes of life sciences company Agilent Technologies, spectrometer-maker Oxford Instruments or PerkinElmer.

Feed The Beast
2015 was a big year for dealmaking at Danaher. It will need strong follow-up acquisitions to keep the momentum going.
Source: Bloomberg

Danaher should also think about taking its breakup one step further by separating its dental business from the rest of the life-sciences operations. Dental has been one of the spottier parts of what will be the new Danaher and the last thing the company wants is to have its shiny new structure dragged down by an underperformer. Danaher just acquired dental-implant maker Nobel Biocare for $2.2 billion in 2014 and will want to see that deal play out before taking any big strategic moves. It should follow its own example, though, and take action if necessary.

--Rani Molla contributed graphics to this story.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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

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