By Bob Tita
Danaher Corp. intends to break itself in two separate companies next year, becoming the latest industrial conglomerate to isolate business units viewed as having strong growth potential from cyclical, slower-growing business lines.
As part of the breakup, Danaher will acquire filtration equipment make Pall Corp. for $13.6 billion to fortify a revamped business portfolio focused on science, health care and technology markets. Danaher plans to divest its industrial units by assembling them in new public company that will be spun off to Danaher shareholders in a tax-free transaction. The spinoff will complete a shift under way at Danaher for the past few years to exit old-line manufacturing businesses or businesses with little in common.
Other diversified industrial companies that have sold or spun off major business lines to shareholders in recent years include Tyco International PLC., ITT Corp., Illinois Tool Works Inc., Johnson Controls Inc. and Ingersoll-Rand PLC.
While other conglomerates were pressured into realignments by activist investors or slumping profits, Danaher has been among the best-performing conglomerates year after the year. With a business-operating regimen focused on driving out costs and expanding margins, Danaher has a reputation for effectively steering through tough business conditions and quickly harvesting the benefits from business acquisitions.
The new company carved out of Danaher will consist of its testing and measurement equipment unit; the Gilbraco Veeder-Root fuel pumps business; automation gear and sensors; and Matco tools for mechanics. The businesses had combined revenue of about $6 billion in 2014. The company, which hasn't yet been named, will be headed by veteran Danaher executive James Lico, who is now executive vice president in charge of the testing and measurement business and fuel pump line. Danaher expects to complete the spinoff near the end of 2016.
Danaher's co-founders--Chairman Steven Rales and his brother Mitchell Rales, a Danaher director--will serve on the board of the new company. Meanwhile, Thomas Joyce will remain as CEO of Danaher, which is based in Washington, D.C.
"Danaher will be a more focused science and technology growth company, united by common business models and attractive characteristics," Mr. Joyce said during a conference call Wednesday with analysts. "Our large installed base of instruments is expected to generate a stable and sustainable revenue stream."
Going forward Danaher's portfolio will consist of its life sciences businesses; diagnostic tests, which includes Beckman Coulter, a medical-diagnostic-equipment maker; product identification gear; dental appliances; water treatment equipment; and Pall.
The businesses had combined revenue of $16.5 billion last year. More than two-thirds of the revenue came from replacement parts and sales of consumable items, such as testing kits made by Beckman Coulter. Mr. Joyce said Pall will be a good fit for the revamped lineup.
The Port Washington, N.Y.-based company sells purification and filtration equipment for water and other liquids to biopharmaceutical companies, airplane manufacturers, brewers and municipal water systems. About half of Pall's $2.8 billion of revenue last year came from its life sciences business where about 60% of the sales were derived from the biopharmaceutical industry, which produces drugs, vaccines and other treatments from biological sources, rather than chemicals.
Pall's industrial business unit generated $1.3 billion of revenue last year. Municipal water systems and other process industries accounted for about two-thirds of industrial's revenue.
Danaher will pay Pall shareholders $127.20 in cash for each of their shares, about a 28% premium over the closing price of Pall's stock on Monday. The purchase of Pall is Danaher's largest acquisition to date, surpassing the purchase of Beckman Coulter in 2011 for $5.9 billion.
As Danaher devoted more resources to large-size acquisitions of science and technology companies, Mr. Joyce said the industrial units have become increasingly deprived of investment. By launching these businesses into a separate company, Mr. Joyce predicted they will be better able to pursue acquisitions and raise capital.
"A focused, coherent straightforward structure [will] allow them to focus on their end-markets and have renewed license to do mergers and acquisitions," he said.
Danaher's stock was recently trading up 1.4% at $87.19.
Write to Bob Tita at firstname.lastname@example.org
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