BREAKINGVIEWS-Danaher’s $10 bln M&A pivot demands faith

By Robert Cyran

NEW YORK, Feb 17 (Reuters Breakingviews) - Healthcare giant Danaher’s DHR.N insatiable deal appetite is justified by an exceptional track record. Or, at least, it was. Over the last decade, the company acquired a bunch of fast-growing and highly profitable businesses that help make biological products. After a post-pandemic slump, though, returns have been wanting. That recent weakness and a surprising focus-area shift help explain investors’ negative reaction to the $10 billion purchase of Masimo announced on Tuesday. Nonetheless, Danaher’s changing M&A tastes look well-suited to the moment.

Masimo MASI.O makes patient monitoring systems. It’s probably best known for a high-profile lawsuit against technology-festooned watchmaker Apple. In November, a jury found the technology giant owed $634 million for violating Masimo’s blood-oxygen measurement patents. Apple said that it would appeal.

Add in tumult from a pushy investor and the seller’s baffling entrance into – and then retreat from – consumer audio equipment, and a $5 billion drop in Danaher’s shares seems justified. Still, Masimo should generate $445 million of operating profit next year, according to analyst estimates compiled by LSEG, while the duo projects $125 million of potential cost cuts. Tax the combined sum at the statutory corporate rate, and that’s a 5% return on investment. That’s not stellar, but expected revenue growth of up to 10% raises the future upside.

The more pressing question is whether this is a better use of capital than pursuing more biosciences deals. Over 50% of the company’s topline comes from acquisitions struck in the past decade, like the $21 billion purchase of General Electric’s biopharmaceutical business in 2019. Danaher is, at its core, a life sciences outfit. Moreover, operating margins are high, at 26% for its biotechnology unit. Yet this determined focus has led to shares underperforming the market for the last five years.

This slump was probably inevitable. Booming spending on drugs and research during the pandemic led to a multi-year hangover as medical urgency ebbed, impacting companies like Danaher that sell tools and supplies. Management foresees still-restrained growth this year. Adding some ballast from a new business line could help even out results. It has worked before, as with the purchase of testing firm Cepheid for $4 billion in 2016. Since then, revenue at Danaher’s diagnostics unit has doubled, while operating profit has tripled.

If the historical trend of rising medical spending reasserts itself, Danaher’s still-reasonable valuation of 19 times estimated EBITDA over the next year leaves it with equity firepower to fund pursuit of bigger, more traditional game. For now, though, an opportunistic tuck-in like Masimo is a reasonable way to feed M&A hunger.

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CONTEXT NEWS

Danaher said on February 17 that it had agreed to buy Masimo, a company that makes patient monitoring systems, in a $9.9 billion deal including debt. Danaher will pay $180 for each share of Masimo, a premium of 38% to their closing price on February 13, the last day of trading before the deal was announced.

Citigroup served as financial advisor to Danaher, with Goldman Sachs providing advisory support. Centerview Partners served as advisor to Masimo, with Morgan Stanley also providing advice.