Anyone who has been paying much attention to the situation at GE (NYSE: GE) over the past few years is aware that the conglomerate is in slim-down mode. CEO Larry Culp has been selling off non-core assets and trying to turn it into a much more focused organization. The latest big move in that transformation: Culp has sold a large chunk of his new company to his old one, Danaher.
In this segment from MarketFoolery, host Chris Hill and Motley Fool Chief Investment Officer Andy Cross consider the reasons why Wall Street is applauding the deal -- not least of which is that it gives GE a nice chunk of change to pay down its debt. On the other side of the equation, serial acquirer Danaher gets a solid biopharma business to add to its thriving life sciences family, and if it's paying a premium, analysts appear to think it's worth it. They also talk broadly about large acquisitions as a strategy, versus smaller, so-called "tuck-in" acquisitions.
A full transcript follows the video.
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This video was recorded on Feb. 25, 2019.
Chris Hill: Shares of General Electric up 10% this morning. I know! I'm incredulous to say that out loud! GE is selling its biopharma business to Danaher for $21 billion and change. Probably not a surprise that the stock would be up. GE says they're going to use the money to get their balance sheet in order, reduce their leverage. This seems like the obvious smart thing to do.
Andy Cross: Yeah, they have to do that. A little more surprising is that Danaher's stock is up about 8% as well, too, Chris, as we're talking here. Clearly investors see this as a good sign for both companies. Danaher is a serially acquisitive company. It's local here in D.C. They've been enormously successful in rolling up operations over the years and building a life-sciences-focused business. They're going to take this on from GE as GE tries to separate its biotech businesses from its other operations and, like you said, get its balance sheet in order and bring a little life back into that business.
For Danaher investors, you're getting a pretty solid business. They're going to pay a premium for this. They're going to pay a nice penny for it at 17X operating profits, but be able to now put it into a family that has real experience in managing life sciences operations. Good move that investors are seeing across the board.
Hill: In the same way that we expect brands to be sold off from Kraft Heinz, is it reasonable to expect that this is not the only selling that General Electric is going to be doing this year?
Cross: I think probably. Larry Culp, who took on the role at GE as CEO, used to be the CEO of Danaher. There's a connection there.
Hill: So he just called an old friend?
Cross: He probably called up an old friend, said, "Hey, what do you think? I have a business I want to sell, you got $21 billion to spare?" It won't be surprising if we see GE continue to focus and shed operations as they look to bounce off these lows. It's nice to see the stock has rebounded for shareholders of GE.
Hill: Stepping back and looking at, in the case of Berkshire Hathaway and General Electric, these two... I was going to say, "two enormous companies." General Electric, a lot smaller than it used to be. How do you think about mergers and acquisitions, given everything we've seen play out over the last few years?
Cross: Historically, if you go back decades, large acquisitions, large mergers, tend not to work out. Danaher and some other companies have had consistent small what are called tuck-in acquisitions at reasonable prices, to be able to put them into their marketing engine, put them into their sales pipeline, take some costs out of the operations, especially on the back-end, back-office operations. Those tend to work much better. Companies that can borrow at reasonable rates and make those acquisitions and get some higher returns from them can be a good use of capital.
The large ones, the large mergers, these big acquisitions, tend to make me a little bit less confident that this isn't just more empire-building from a CEO, from a board that just wants to be bigger. We saw a big merger with the bank world, BB&T and SunTrust earlier this year. We'll see how that plays out over time.
Hill: When you were talking about tuck-in acquisitions, it reminded me of a company that was in the news recently for a change at the top, Middleby. It's a company we've followed pretty closely here at The Motley Fool over the past decade. Middleby has done a phenomenal job of growing that business by making those type of tuck-in acquisitions that are very much in their wheelhouse.
Cross: That's exactly right, Chris. If you think about how Middleby has gone and made north of 40 acquisitions over the last couple of decades, they bring them into their sales pipelines, their sales force, help take some costs out. The Viking acquisition they made didn't go very smoothly. That was their largest. So, again, as these companies start to stretch a little bit, start to take on a little bit more challenges and turnaround stories, trying to get more costs out of there, especially on the consumer side -- where Viking plays -- that's a little bit more tricky. Certainly, we're seeing that with the Kraft and Heinz merger as well.
I think generally, there are some companies that have a history of doing this well. Selim Bassoul at Middleby is definitely one of them, and there are others, like Danaher, where these tuck-in acquisitions can add value for shareholders. But I would say, generally, they're more the exception than the rule.
Andy Cross owns shares of BRK-B, KHC, and MIDD. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends BRK-B and MIDD. The Motley Fool has a disclosure policy.
