Deals

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

The new, nimbler Danaher has expensive taste.

The $55 billion company said Tuesday that it will buy diagnostics-equipment maker Cepheid for about $4 billion, marking its first major purchase since completing the spinoff of its more industrial-focused businesses in July. The quick turnaround between the split and this week's deal announcement helps reinforce the logic of the breakup, which Danaher said would help it focus in on life sciences and make it easier to find growth-boosting acquisitions. Easier to find doesn't necessarily mean cheap to buy, though.

The Benefits of Breaking Up
Since it's breakup, Danaher has traded at a higher earnings multiple than life-sciences rival Thermo Fisher. But there's a downside to competing for deals in this industry.
Source: Bloomberg

At $53 a share, Danaher's offer values Cepheid at around 5.5 times its projected revenue for 2017. That's more than double the median multiple that Danaher has historically paid. Among its 18 public-company takeovers of size tracked by Bloomberg, Cepheid is one of just a few targets that generate little to no profit -- even though it's had products on the market for years. As such, Danaher isn't signaling a meaningful boost to earnings until year five and even then, it's forecasting a gain on an adjusted basis.  

For a company that's built up a reputation for making smart, accretive takeovers, this is a bit of a departure. Even Danaher's takeover of filtration-technology maker Pall last year -- itself a pricey purchase -- was expected to add decently to non-GAAP earnings in year one.

Investors usually tend to give Danaher the benefit of the doubt, with the shares typically rising when the frequently acquisitive company decides to put some of its money to work, Evercore ISI analyst Ross Muken noted before the markets opened on Tuesday. But in response to the Cepheid deal, Danaher fell as much as 2.2 percent for the biggest intraday drop since June.

Change Is Scary
Danaher shares fell Tuesday on news of its pricey Cepheid deal.
Source: Bloomberg

Some change in acquisition taste was to be expected. That's the price you pay for deciding to become a life-sciences company (with the multiple to match) instead of an industrial conglomerate. Competition for acquisitions is fierce and the targets tend to be expensive even before you tack on a premium. Deals also tend to be more focused on growth, rather than the cost-cutting opportunities that have been Danaher's trademark.

Take Cepheid. Muken of Evercore estimated that the purchase could add 50 basis points to Danaher's organic growth. But to get that growth, Cepheid needs to invest in its sales force and R&D, making cuts more challenging, notes Wells Fargo analyst Tim Evans.

Investors will have to adjust their expectations for Danaher's future M&A. The problem is that even in the context of life-sciences deals, the Cepheid purchase looks pricey. Danaher is paying nearly double the median trailing 12-month revenue multiple offered in major health-care products acquisitions over the last five years. Remember, this is a company with profitability struggles in a highly competitive industry.

On Sale (Kind Of)
Cepheid shares have slumped in the last year. That doesn't mean it's cheap.
Source: Bloomberg

Danaher may yet pull this deal off, as it has numerous transactions before this. To its credit, it's not buying at the very top. Cepheid traded for almost $64 a share last July before profit struggles and a general investor distaste for biotechnology stocks dragged it down. But investors' confidence is rightly a bit shaken.

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