Danaher: filtered out

It just so happens that a successful conglomerate does not have to have a rollicking bank on the side (looking at you, General Electric) to drive spectacular returns. It is excusable not to have heard of industrial group Danaher until Tuesday, when it spent $14bn in cash to buy filtration company Pall Corporation. There is no Danaher brand per se. Rather it is a collection of the $44bn of businesses it has bought since 2000 in a handful of industries - from environmental and water equipment to laboratory test kit and dental products. That sounds plain, but over the past decade Danaher's total shareholder return has been 203 per cent.

Its secret sauce is something called the Danaher Business System, which sounds like the usual vacuous corporate-speak. But the method has produced returns, allowing Danaher to wring cost savings out of businesses that are not growing quickly. Between 2012 and its forecast for 2015, annual organic revenue growth will average about 3 per cent. But earnings per share will have jumped about 10 per cent each year.

The Pall deal is in some ways a departure for Danaher. Like much of Danaher's business, Pall makes money from "consumables" - filtration products that are used and then reordered, creating a steady income. But the Pall deal is big compared to previous buyouts, which have been in the $1bn to $6bn range. Pall is also expensive at 21 times cash flow.

Still, Danaher shares rose a few percentage points on news of the deal. That may be because of another announcement the company made. Danaher will ditch its conglomerate status by separating into two listed companies. One will be a life sciences company with $16bn in revenue (including Pall), the other will house the remaining industrial businesses. Life science companies trade at higher valuations. It seems that even the best conglomerates can sometimes struggle to get the credit they crave.

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