By Orlando Poraqi, Christopher Gvenetadze and Iulian Paval (University of Bocconi) - Date: 15/06/2019
Overview of the deal
Acquirer: Danaher Corporation
Target: General Electric Biopharma Business Unit
Estimated value: $21.4bn
Announcement date: 25.02.2019
Acquirer Advisors: Barclays, Kirkland & Ellis
Target Advisors: PJT, JPMorgan Chase, Citigroup, Goldman Sachs
General Electric (GE) has been in a turbulent phase since its economic downfall in the aftermath of the 2008 financial crisis. According to CEO Larry Culp, the solution seems to lay in its two core businesses: Aviation and Power. To fulfil the strategy, GE has decided to sell its biopharma business, excluding the diagnostic department, to Danaher Corporation for $21.4bn in an all-cash deal in 2019. GE will be using the proceeds to repay a portion of its debt it has accumulated last year after making a loss of $23bn and partially improve its financial situation. The acquisition is a good fit for Danaher’s portfolio since the company has shifted the strategical focus on the Health sector and will be able to penetrate the market with strong-brand cross-industry assets, using the acquired technology for research and production of medication.
“This acquisition will bring a talented and passionate team as well as a highly innovative, industry-leading product suite to our Life Sciences portfolio, providing an excellent complement to our current biologics workflow solutions,” -Thomas P. Joyce, Jr., Danaher CEO
Acquirer Company Details (Danaher)
Danaher is an international Fortune 500 conglomerate managing a portfolio of over 400 companies active in the Life Sciences, Diagnostics, Dental, Water Quality and Product Identification industries.
- Founded in 1969, headquartered in Washington D.C., USA
- President and CEO: Thomas P. Joyce Jr.
- Number of employees: 62,000
- Market Cap: $93.74bn - EV: $101.92bn
- LTM Revenue: $20.07bn - LTM EBITDA: $4.7bn
- LTM EV/Revenue: 5.08x - LTM EV/EBITDA: 21.06x
Target Company Details (General Electric)
General Electric is one of the biggest conglomerates in the world, managing a highly diversified portfolio. Its core businesses include aviation and electricity generation Their strongest commitments in R&D focus on medical technologies and financial services.
- Founded in 1892, headquartered in Boston, USA
- President and CEO: H. Lawrence Culp Jr.
- Number of employees: 313,000
- Market Cap: $83.351bn - EV: $197.78bn
- LTM Revenue: $121.61bn - LTM EBITDA: $15.88bn
- LTM EV/Revenue: 1.63x - LTM EV/EBITDA: 12.45x
Projections and Assumptions
Short term consequences
The financial market had a positive reaction to the announced news resulting in a sharp increase in the shares of both companies. Danaher Corporation’s share price showed a record high of $123.21 at the announcement day and GE respectively a 6.9% increase to $10.82. Unfortunately for GE, the optimism of the investors was not sustained, resulting in a dive of the share price to $9.11 ten days after the acquisition from which it has not recovered itself to this day. GE’s plans of an IPO of the $20bn Healthcare unit will be postponed until the transaction with Danaher is complete at the end of the year, leaving GE with a $17bn business of imaging equipment. Danaher has already acquired two medical testing companies: Fortive Corp. and Integrated DNA Technologies, for a total of $6bn in the last three years. The combination of the medical know-how from the testing companies will be combined with the biopharma segment, making this acquisition the cornerstone of becoming a major supplier of technology for the pharma industry.
The acquisition will transfer $400M from GE’s $21bn pension fund liabilities to Danaher, which will have a positive effect on the reduction of the $120bn debt pile GE is currently sitting on.
Long term upsides
It is of primary importance to understand that the current deal was settled following General Electric’s organisational plans to break up and strategically realign core assets to attain profitability and overcome the dim public view over the company. The selling of the Biopharma division, part of the Life Science arm, is considered to be the plan B after an IPO for the entire Healthcare arm was discussed, as part of GE’s efforts to reestablish aviation and power industries as the sole operating fields. By disassembling the group divisions, both GE and its commercial partners might better concentrate and allocate industry-specific assets to stimulate both cross-industry and vertical integration synergies (with this deal, GE will be able to pursue its main organisational goals and Danaher to benefit from first-class technological resources and specific know-how).
Observing the interest of the pharmaceutical companies in biological technology (biotech) companies and the previous transactions completed in the last 12 months, it is more clear that traditional pharma and chemical methods start to rely on genetical engineering, cell-level immunology transformations and cutting-edge diagnosis and identification software. Danaher will be able to advance its research and multichannel distribution of core services in all the segments it operates into, from Dental to Environmental & Applied solutions. After being a customer for GE’s Biopharma unit, the Dental division of Danaher, which underperformed in terms of profitability compared to other divisions, is expected to grasp the anticipated synergy offerings and boost its operations.
The acquirer is expected to fully integrate the Biopharma unit as a stand-alone company which would provide fast support to the entire Danaher company portfolio, using the acclaimed Danaher Business System management model which relies on the general idea that “exceptional people develop outstanding plans and execute them using world-class tools to construct sustainable processes, resulting in superior performance”.
Risks and Uncertainties
The current market conditions, past economic and business performance of the GE units, public opinion on group issues and the desired targets in terms of profitability raise a question on whether GE will be able to make a genuinely efficient and profit-oriented investment in assets with the remaining money. Moreover, the implication of the current deal can be taken as far as the leadership of the GE group has served in the past as an executive for Danaher. As different sources related, Mr Culp strikes a presumable ‘win-win’ situation for the two companies, leading to uncertainties concerning the existence of a higher bidder.
On Danaher’s side, the acquired technology has to perfectly accompany the current business portfolio operations to remain competitive on the market and be able to deliver comparable results to other big pharma corporations which absorbed biotech companies (e.g. Merck buying Immune Design or Bayer AG acquiring Monsanto). The acquirer has to find a sustainable formula to both integrate GE’s technology in a specific way for each business segment and push R&D and delivery efforts further. All SCIEX, Leica Microsystems, Molecular Devices, Phenomenex and IDT businesses have to make use of the GE instruments, consumables and software that support the research, process development and manufacturing workflows of drugs to increase profitability as to top the industry average (as per 31 December 2018, Biotech & Drugs industry gross profit average was 76.72%, and Danaher’s was 55.83%, in accordance to CSIMarket)
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