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Danaher to Buy Pall, Split Up Businesses -- 2nd Update

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05/13/2015 | 05:35pm EST
By Bob Tita 

Industrial conglomerate Danaher Corp. intends to break itself in two next year, becoming the latest company to isolate units viewed as having strong growth potential from cyclical, slower-growing business lines.

As part of the breakup, Danaher will acquire filtration-equipment maker Pall Corp. for $13.6 billion to fortify a revamped business portfolio focused on science, health care and technology markets.

Danaher plans to divest itself of its industrial units by assembling them in a 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 profit, Danaher has been among the best-performing conglomerates year after 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.

Danaher's annual sales grew at a compounded annual rate of 9.6% from 2006 through 2014, compared with a 5.5% average for the conglomerate sector, according to Barclays, which described the company earlier this month as among the few "that consistently screen at the top of most metrics." The company's annual operating margin has topped its peers for eight straight years, with 17.2% last year, compared with the sector average of 14.8%.

The new company carved out of Danaher will consist of its testing and measurement equipment unit; the Gilbarco 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, though several of them are susceptible to sharp swings in demand, and grew last year about 2%, according to analyst estimates.

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 chief executive 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 and diagnostics businesses, which includes Beckman Coulter, a medical-diagnostic-equipment maker; product-identification gear; dental appliances; water-treatment equipment; and Pall.

The businesses had combined revenue last year of $16.5 billion, estimated at about 5% above 2013. More than two-thirds of the revenue came from replacement parts and sales of consumable items, such as testing kits made by Beckman Coulter, that customers use regularly. 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, such as chemical manufacturing, accounted for about two-thirds of the unit's revenue.

"Pall has been run well," said Richard Eastman, an analyst for Robert W. Baird in Milwaukee. "It has a great business portfolio and a great market position."

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. That was before The Wall Street Journal first reported Monday evening that Pall was in discussions with suitors including Danaher.

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 shares gained 1.6%, or $1.35, to $87.35 on Wednesday. The shares have risen 18% in the past 12 months.

Write to Bob Tita at robert.tita@wsj.com

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Stocks mentioned in the article
ChangeLast1st jan.
CCL INDUSTRIES INC. -1.02% 44.5 Delayed Quote.-14.41%
DANAHER CORPORATION -3.37% 152.085 Delayed Quote.2.18%
ILLINOIS TOOL WORKS INC. -2.63% 178.57 Delayed Quote.1.91%
INGERSOLL-RAND -2.50% 138.74 Delayed Quote.9.57%
ONE STOP SYSTEMS, INC. -8.17% 2.38 Delayed Quote.27.23%
PALL CORPORATION -0.01% 127.11 Delayed Quote.25.59%
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