Breakingviews: Beware spins from Danaher’s well-oiled M&A machine

Even the best-engineered devices sputter on occasion. Consider Danaher’s well-oiled M&A machine. The $200 billion conglomerate runs acquisitions through its signature kaizen-based system, delivering improvements which churn out model returns for shareholders. When parts are spun back out, however, they run less smoothly.

It’s a timely lesson as Danaher prepares to separate another division. Boss Rainer Blair is carving out the Environmental & Applied Solutions unit, which generated $4.7 billion of revenue last year from consumer packaging and water purification kit, in a tax-free transaction by the end of 2023. Although the division grew more slowly and was less profitable than the parent’s core lab equipment and biotechnology tools business last year, it’s a steady one that might appeal to acquisitive rivals.

Absent that outcome, there’s reason for investors to be concerned. The Danaher Business System, a 36-year-old data-driven process of continuous improvement, has worked a treat on dozens of deals. Last month, the company showcased how the operating margin at Pall increased by 10 percentage points after it bought the filtration and purification company for $13.8 billion in 2016. Danaher, which split itself in two the same year, has generated an annualized total shareholder return of 22% since then, double the return of the S&P 500 Index.

Shareholders who received a share in diagnostic equipment maker Fortive for each two Danaher shares they owned have fared less well. At the time of the spinoff, 10,000 Danaher shares were worth $775,000 and have since returned some $1.9 million. By comparison, 5,000 Fortive shares valued at $200,000 are now worth only $100,000 more. Making things worse, the stock price of Vontier, an industrial technologies business spun off by Fortive in October 2020, has halved.

Danaher’s next effort disappointed, too. An investor who bought 10,000 shares of Danaher in December 2019, when it fully separated its Envista dental business, would have spent $1.5 million and hold shares worth an additional $1.2 million nearly three years later, including reinvested dividends. The equivalent 55,580 shares of Envista given to Danaher shareholders, initially worth $1.6 million, have gained just $240,000 over the same period.

These outcomes suggest that sustaining or replicating a successful management approach is difficult, even for a subsidiary. Larry Culp, himself a Danaher spinoff who ran the company from 2001 to 2014, knows this well. Since he took the top job at General Electric four years ago, the industrial group’s shares have declined 26%. When Danaher produces its latest spinoff next year, tread carefully.