Dis-aggregation and Shoaling: Adding Value to Shareholders Equity

June 28, 2017

 

We have heard a lot about Mergers, and their triumphs and travails. For every successful merger, there are two failures. While immediate gains of mergers are reported and celebrated, the long-term quagmires and value erosion caused by mergers are scantly examined. For four decades, corporate world witnessed a big spell of merger mania with the claims of quick growth, consolidation, scale economy, and raising industry barriers. CEOs gained their eminence or lost their reputation based on their mergers gamble. 

 

Academic research on its part mined the mergers data into large expanse of knowledge juxtaposing the contexts and mediating factors beneath the victories and vicissitudes of mergers. Overall, the mergers have not worked-out well for most firms. Certainly, shareholders have lost their bets in the long-term in most cases. Expected yield did not occur in many mergers and research data attest to these facts for sure. 

 

As a redaction and new strategy, however, now many large companies are dis-aggregating their assets before pursuing any new merger decision. Slicing the firm as smaller independent entities or organizing the corporation as shoaling formation is creating more value for shareholders. Given the high volume of capital that flows into stock market expecting quicker returns, it won't be a surprise if each of the smaller unit stock will gain much higher returns than they would under one larger firm stock provided they are brought under common brand or board or holding company. Some large firms have already moved to take advantage of this trend by creating more investment opportunities by splitting their firm. Following HP, Alocoa, Google, now another Fortune 500 company, Danaher Corporation split into two corporations with interlocking board structures. 

 

D.C.-based Danaher Corp., a conglomerate billed as “a global science and technology innovator” that earned more than $20 billion in revenue in 2015, has begun the process to splitting into two.According to The Washington Post, the company began formalizing the split last week, with Danaher shareholders receiving one share of the spinoff, named Fortive Corp., for every two shares of Danaher. Danaher (NYSE: DHR) owns 40 businesses around the world and has long kept a low profile in the region. It was profiled last week in the Washington Business Journal as one of the region’s largest and most inconspicuous companies. Analysts said the split will likely allow the two companies to be more nimble in their growth strategies, according to the report. 

 

With the split, Danaher will keep its life sciences, diagnostics, dental, water quality and product identification segments, while Fortive will take on test and measurement, industrial technologies and petroleum segments. After the split, Danaher will become New Danaher. 

 

Fortive will be headquartered in Everett, Washington. It will begin trading July 5 on the New York Stock Exchange under the symbol FTV, according to The Washington Post. 

 

Danaher was conceived in 1984 by brothers Steven and Mitchell Rales after a Montana fishing trip. While on a tributary of the south fork of the Flat Head River, a stream that was called the Danaher, the brothers envisioned a manufacturing company modeled on the Japanese concept of kaizen, which means “continuous improvement.” They later charted their plan from a business that already existed, transforming a real estate investment trust into a conglomerate that would acquire companies with “high performance potential” that needed a boost. 

 

Danaher restructured in 1989, and made its first $1 billion in revenue in 1995. Thomas Joyce is the current company president and CEO. It clocked in at No. 133 on the 2016 Fortune 500 list. Both Rales brothers will own about 6 percent of Fortive after the split, according to the Post. Steven Rales, Danaher’s chairman, will be a director at Fortive. Mitchell Rales, chairman of Danaher’s executive committee, will be a board member with Fortive. Following chart depicts the gains to shareholders after the split.

 

 

 

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