Danaher Corp.’s $6.8 billion buy of Brea-based Beckman Coulter Inc.—one of the biggest deals for an Orange County-based company in recent years—had its roots in an engineering decision that lacked any engineering rationale.
“I think we lost some engineering discipline,” said Glenn Schafer, retired vice chairman of Newport Beach-based Pacific Life Insurance Co. and Beckman’s chairman at the time of the sale. “We may have lost our way a little bit.”
The engineering decision had to do with a change to its troponin test, used to detect a protein found in the blood after a heart attack.
“Some engineer some place decided that instead of stirring the blood in the test tube continuously while the test was happening, we only needed to stir it one-third of the time,” Schafer said.
Scrutiny
The test was having problems in one of every 10,000 cases, enough to draw the scrutiny of the Food and Drug Administra-tion. The problem was compounded because the troponin tests were run on two of Beckman’s best-selling machines.
Beckman never found a clear reason for the change but eventually identified and solved the problem, thanks to an assist from a retired engineer.
By then, however, the change had led to enough problems to set off a chain reaction. A recall of the test, shareholder suits, the departure of the chief executive and lowered guidance combined to hammer Beckman’s share price to the point where it became a takeover target.
Things ended well for Beckman, which makes an extensive lineup of machines and chemicals used by hospitals and medical laboratories running tests for doctors. Medical researchers also use its products. The company has annual sales of more than $3 billion and has been among the foremost medical device makers for decades.
The problem with the troponin test couldn’t wipe away the company’s larger stature as a leader in its industry.
Beckman was still “a good asset, an iconic business,” according to Arnold Pinkston, Beckman’s former vice president and general counsel.
Pinkston and Schafer joined James Katz-man, a San Francisco-based managing director of Goldman Sachs & Co., to discuss the anatomy of the Danaher-Beckman deal at a panel discussion presented last week by the Forum for Corporate Directors at the Pacific Club in Newport Beach.
Cary Hyden, a partner at Latham & Watkins LLP’s Costa Mesa office who also worked on the deal, moderated the panel.
Danaher is a Washington, D.C., conglomerate known for Craftsman tools sold at Sears stores. It struck a deal to buy Beckman in February, ending several months of jockeying for the company.
“There’s no M&A transaction that I’ve been a part of that had as many fascinating twists and turns and complex issues that needed to be dealt with,” said Hyden, who worked on “well over 100” mergers and acquisitions during his 28-year career.
The first turn came off a high point in early 2010. Beckman had just bought Japan-based Olympus Corp.’s medical diagnostic business for $800 million.
Investors liked the deal, and their “optimism and enthusiasm” pushed Beckman’s shares near $70, according to Hyden.
Turn Begins
“And then, things started to turn,” Hyden said.
Schafer said Beckman was “a fantastic company” with a strong customer base for its machines and tests and a lofty reputation in the healthcare industry.
Yet the trouble with troponin indicated “we lost an engineering discipline that was important to us,” Schafer said.
Concerns intensified when problems arose with a glucose-testing machine. Some customers decided to use bleach to clean machines instead of paying for company-provided cleaners. The bleach caused corrosion and problems with the test in some cases.
Beckman went to work on its problems, assigning directors Bill Kelley and Peter Dervan to a special committee.
Its members faced some internal hurdles.
“I think it’s fair to say that we had a little resistance” from then-chief executive Scott Garrett about the committee and “some resistance about how much of a problem this could eventually be for the company,” Schafer said.
“Eventually, those things led to the departure of the CEO,” he said.
Garrett, who had been Beckman’s chief executive since 2005, stepped down from his post in September. Longtime Beckman human resources head J. Robert Hurley became interim chief executive and now runs the company with full title under Danaher’s ownership.
Danaher Enters Picture
Danaher first entered the picture about the time of Garrett’s departure with a call to Schafer, telling him it wanted to buy Beckman.
Beckman had a “playbook” ready.
“We had advisers in place—both Latham and Goldman—were in place for some years, ready to defend the company,” Pinkston said.
The wheels started turning with Beckman shares in the mid-to-high $40 range after months of FDA attention, lawsuits and the lowered guidance.
Goldman Sachs’ Katzman said the dipping shares drew a field of potential bidders in part because the market was generally up.
Beckman’s board flatly rejected Danaher’s initial offer of $65 a share with exclusive negotiating rights, calling it “a yawn.”
The company still faced a number of problems and hadn’t yet figured out the change on the troponin test. “We concluded we were in play and should try to get the best price,” Schafer said.
Goldman Sachs went to work.
“$65 just doesn’t get it done, so try again,” Katzman told Danaher executives on behalf of Beckman’s board.
Danaher later came back with an offer of $68.50 a share, then one at $70 a share.
The latter set the floor on negotiations, Katzman said. A field of 10 bidders willing to go at least $70 and sign confidentiality agreements took shape, according to a Securities and Exchange Commission filing.
Beckman tried to keep the transaction quiet, but word leaked in early December that it was accepting bids.
When that news came out, Pinkston said it “(disrupted) people’s mindset” and added more concerns to Beckman’s already-worried workforce.
“Those were the angriest days,” Schafer said. “It seemed that at least one person was leaking the most intimate details of the bidding process.”
The field took on various shapes in December and January. Goldman Sachs worked to shepherd several private equity firms into teams on bids. The leaks knocked one bidder out.
“We actually lost one … very good strategic bidder, because it played out in the press,” Katzman said.
Field Trimmed
The field was trimmed to four, and Danaher didn’t make the grade initially. It eventually sweetened its offer enough to bust back into the bidding.
That led to more jockeying and an intense weekend that saw Beckman’s team work through Super Bowl Sunday. The bidders agreed to submit their proposals on the next day as Beckman’s board convened.
Waltham, Mass.-based PerkinElmer Inc. had the high bid at $83.25 a share. Danaher came next, at $83 a share and a provision for a 19-cent dividend.
Beckman’s board considered the two bids into the evening. Directors decided to give Danaher a shot to boost its bid to $83.50.
It was near 12 midnight by then, and calls went to Danaher executives on the East Coast in the wee hours of the morning.
They came back at $83.50 a share—about 75% more than the stock’s price when Beckman’s problems started, 28% over Danaher’s first offer, and a 19% boost from the floor set for the sale early on in the process.
Beckman also liked the deal for other reasons, according to Schafer.
“Danaher’s a terrific company,” he said. “Most of the operations are staying in Orange County, and they had the financial wherewithal to weather some of the issues that the company has.”
