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Danaher cut 60% of its complexity
Too complex
Under Larry Culp, Danaher grew from about $3 billion in revenue to $14 billion by buying good businesses with good brands, and it began moving into healthcare. By 2014, near the end of Culp's tenure, the board saw that the company had become too complex. Running 50 strategic plans and 50 operating reviews made it hard to go deep on any one business as global competition came in.
The spin-off
The fix under Tom Joyce was to simplify. Danaher spun off all of its original heavy-duty industrial businesses into a separate company, Fortive, in a tax-efficient way that also gave Fortive an investment-grade balance sheet. Out the door went about 25 percent of revenue and about 60 percent of the complexity, measured in operating companies. The dental business was spun off as well.
What came in
Coming in were Cepheid, the top molecular diagnostics testing business in the world, IDT, the leader in manufacturing oligos, an $11 billion filtration deal for biologics, and Cytiva. Joyce's acquisitions came to about $43 billion. Danaher now covers 80 to 85 percent of the workflow needed for biologics manufacturing, where its closest competitor covers maybe 40 to 50 percent.
Why do companies spin off whole divisions?
A spin-off distributes shares of a division to the parent's shareholders, creating two separate public companies. Investors can then value each business on its own. Economists Philip Berger and Eli Ofek found in a 1995 study that diversified US companies traded at a discount of 13 to 15 percent against the values of their separate parts. Spin-offs can be structured to be tax-free in the United States when they meet the requirements of Section 355 of the tax code.
Why does an investment-grade balance sheet matter?
Credit rating agencies such as Moody's and Standard & Poor's grade a company's ability to repay debt, and investment grade is the upper tier, BBB- or Baa3 and above. Companies in that tier borrow at lower interest rates. Many pension funds and insurers are limited by their own rules to holding investment-grade bonds, which gives such companies a larger pool of lenders.
How are oligos manufactured?
Oligos are short strands of DNA or RNA built chemically one building block at a time. The standard method, phosphoramidite chemistry, was developed by Marvin Caruthers at the University of Colorado in the early 1980s. A machine adds each nucleotide in a cycle of reactions, then cleaves the finished strand off a solid support. Scientists use oligos as primers and probes in tests such as PCR.
How do cartridge-based molecular tests work?
A cartridge holds the reagents and chambers needed for the entire test, so the sample goes in and the instrument handles the rest. The instrument breaks open the cells, extracts the genetic material, and runs polymerase chain reaction, the method Kary Mullis devised in 1983, to copy any target sequence many times. Fluorescent probes light up when the target is present, and the instrument reads the signal. Because everything stays sealed, the test can run outside a central laboratory.
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