"Conglomerate" is often a scary word for investors. There are certainly examples of top-notch conglomerates. Of course, the prime example is Berkshire Hathaway (NYSE: BRK-B). It helps that the CEO — Warren Buffett — is one of the world's smartest investors, who has an uncanny ability to efficiently allocate capital. The result has been market-beating returns for shareholders.
But Berkshire is not an outlier. In fact, there are other best-of-breed conglomerates, although, they are often overlooked.
The reason conglomerates are often overlooked is because these companies have historically ravaged many portfolios. Some of the problems include corporate bloat, culture clashes, and lack of focus and vision. There is actually an investing concept known as the "conglomerate discount," in which investors tend to drive valuation of a company lower because of the disadvantages. The solution is often to spin-off the divisions.
Despite all this, one of the standouts is Danaher (NYSE: DHR). The company develops equipment and solutions for a broad array of industries such as dentistry, life sciences, diagnostics and industrial testing.
In the past five years, revenue has risen from $7.9 billion to $13.2 billion, with earnings per share (EPS) climbing from $1.31 to $2.31. Much of the growth has been through an aggressive mergers & acquisitions (M&A) strategy.
And investors have certainly benefited nicely. For the past 20 years, the stock's total return has been a whopping 4,881%, compared to only 489% for the S&P 500.
Why the success? After all, just about every academic study shows that M&A deals tend to underperform — that is, for the buyer.
But like anything, success often comes from practice. As for Danaher, M&A is part of its corporate DNA. The firm has a set of tools and processes called the Danaher Business System (DBS). The focus is on continuous improvement of business performance, such as with costs, innovation and quality. The DBS approach has definitely been critical in integrating acquisitions, which can often be tricky.
As a result, Danaher usually derives substantial revenue and cost strategies from its deals. This allows the company to pay premiums for its transactions and snag top-notch targets.
Look at its latest deal for Beckman Coulter (NYSE: BEC). Beckman has a strong portfolio of complex biomedical testing technologies. The installed base is about 200,000. At a purchase price of $7 billion, the transaction came to roughly 8.6 times earnings before interest, taxes, depreciation and amortization (EBITDA). Danaher was able to beat out private equity powerhouses like the Blackstone Group (NYSE: BX) and the Carlyle Group.
The Beckman acquisition will double Danaher's exposure to the life sciences market, which has a strong long-term growth outlook. True, Beckman has had problems with quality, but this should be managed with the DBS system. For example, the estimated cost synergies are roughly $250 million. Interestingly enough, Danaher's stock price actually increased 3% on news of the deal.
Action to Take–> Danaher has a diversified platform of businesses, many of which are in industries with positive trends such as health care and environmental markets. The firm has also been aggressive in moving into emerging economies. Four of its business units earn more than $100 million in annual revenue in China.
However, Danaher is not just about finding efficiencies and cutting costs. It's also been an innovator. Keep in mind that last year it launched roughly 1,800 new products.
Danaher trades at roughly 18 times earnings and 2.5 times revenue. This is about the same as Berkshire Hathaway. But Danaher is much smaller than Berkshire and is likely to be able to post stronger growth. The deal for Beckman will add about $3.7 billion annual revenue as well as a steady stream of free cash flow — which will definitely be a nice boost for the next couple years. If you're thinking about holding a company like Berkshire Hathaway as a core component of your portfolio, you may do better with Danaher instead.
– Tom Taulli
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This article originally appeared on StreetAuthority
Author: Tom Taulli
Forget Berkshire Hathaway — Buy This Instead
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