Capacities M and A Premium

‘Strive not to be a success, but rather to be of value.’ -Albert Einstein.

Acquisition can become a tempting component of corporate growth strategy in times of slow organic growth. Yet research consistently indicates that more than half of M&A deals fail to create value; basically, most of the time this comes down to a coin toss.

It can be tempting to wait for an outside consultant to present the right deal, but by the time the pitch book arrives, it’s probably too late. Given the great stakes and risks associated with mergers and acquisitions, investing the time, money, and organizational focus of senior executives to help overcome the various challenges of M&A-driven growth, prior to any particular deal, should pay for itself many times over.

While each approach to mergers and acquisitions contains elements that are unique to the company or industry and not all companies aim to become serial acquirers, Danaher’s kaizen approach, from search to purchase to integration, provides some ideas on a panoply of best practices. he has perfected the ~400 acquisitions he has made in the last 35 years.

Danaher, a manufacturer of industrial products and hand tools, operates more like a holding company that buys and creates companies. Until his last deal (the $13.6 billion acquisition of Pall in May 2015, twice the size of his previous largest purchase), his focus had been on midsize acquisitions that were then systematically exposed to his operational excellence. As a result, its member companies have become B2B category leaders, consistently delivering high-quality, reliable products and solutions in what would otherwise be a diverse group of professional, medical, industrial and commercial companies. This caused the company’s total shareholder return to increase by 70,000% since the early 1980s versus 5,000% for the S&P 500.

So what accounts for Danaher’s ability to consistently deliver successful acquisitive growth when so many other companies stumble?

1. An investment thesis that takes into account the company’s operating base, its current context and economic realities. It goes beyond generic strategy statements like “strengthen our Asian markets” to identify how the company will compete and create value over time, for example, why us? because right now? How do we get there?

A good investment thesis should be specific enough to clarify where the company wants to increase its exposure, that is, where it should proactively look for trades to avoid “me too” or off-strategy trades that are unlikely to add value.

Danaher has a rigorous system for identifying and bidding on potential acquisitions. Look for industry brands with at least $1 billion in sales and a 5% annual growth rate in an attractive market niche like environmental control or manual tolling, with no outstanding competitors. There should be a clear potential for margin improvement.

two. Clearly established merger and acquisition principles. Danaher has implemented a structured end-to-end process, from deal sourcing to integration, supported by a short list of principles designed to reduce the time and cost of the M&A process.

Thanks to these principles, Danaher focuses its attention on the issues that matter most at each stage of the transaction process. For example, during due diligence, she develops a short list of key deal-breaking business factors early on and focuses most of his efforts on resolving them. During the bidding, he calculates an ‘exit’ value to ensure that the company does not overpay for the deal.

3. Experience that generates value for the acquired business; in Danaher’s case, operational improvement. One of Danahers first acquisitions, brake maker Jacobs Vehicle Systems had begun experimenting with a Toyota-style lean manufacturing system. It worked and Danaher began implementing what became known as the Danaher Business System.

Thanks to this systematic process, Danaher can quickly reap the benefits of business acquisitions through cost reduction and margin expansion. It uses a unique set of continuous productivity improvement tools that has evolved over time to include a host of business activities, including research and development, marketing activities, and plant, supply chain, and back-room operations.

For example, Gilbarco Veeder-Root, a leader in point-of-sale solutions, and Videojet Technologies, which makes coding and marking equipment and software, saw their margins improve by more than 700 basis points after their respective acquisitions.

Four. Active portfolio management and capital allocation. Danaher has continually rebalanced its portfolio by purchasing new businesses and divesting traditional manufacturing businesses or businesses that had become irrelevant to its broader portfolio; its largest divestiture was APEX Tool Group, which it sold to Bain Capital for $1.6 billion in 2012. Danaher has moved 66% of its capital into new businesses since the 1990s.

It also aggressively manages the allocation of your capital across your current and new business or investment opportunities, based on your growth potential and return on invested capital. Excess capital is sent where it is most productive, and all investments pay for the capital they use.

In recent years, its attempt to devote more resources to large acquisitions of science and technology companies has led its industrial units to rely more on organic growth. In order to remain the best machine for doing business, Danaher recently announced its intention to split its business into two: a science and technology growth company that will retain the Danaher name with businesses in diagnostics, water treatment, dental sciences and of life and $16.5 billion in revenue in 2014, and a diversified industrial growth company with combined revenue of $6 billion in 2014 that will be spun off at the end of 2016.

If you want to include mergers and acquisitions as part of your growth strategy, you can pressure test your readiness by starting with 4 questions:

1. Do you have a clear and distinctive investment thesis that outlines the role of mergers and acquisitions in your growth strategy and defines the types of deals for which you are uniquely positioned to add value?

2. Do you spend a significant amount of time refining your investment thesis and looking for potential deals?

3. Do you have a clear set of principles that define your M&A priorities and best practices for executing them?

4. Do you have an explicit capital allocation framework that can assess the value created through competitive uses of funds?

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