The Creation of Danaher's Dental Platform

“It was a long way to go for a pretzel,” recalled Larry Culp , Danaher’s Chief Executive Officer (CEO) between 2001 and 2014. He was referring to his only option for dinner after arriving late in Germany to discuss terms of Danaher Corporation ’s proposed acquisition of Kaltenbach & Voigt (“ KaVo Dental ”). He traveled 4,000 miles for a face-to-face meeting with representatives of KaVo’s founding families in their lawyer’s office.? After years of shuttle diplomacy between the families that owned KaVo, Danaher paid €350m ($425m) to acquire the dental equipment company in 2004. Danaher’s acquisition of KaVo is an example of market entry through acquisition and provides a comparison for Danaher’s other platform-establishing transactions. Danaher used its platform strategy in the dental products market to create one of the industry’s largest players within a three-year period.

This case study is focused on the activities of the key companies in the dental equipment industry that Danaher bought or competed with between 1997 and 2009. The language of business in this storyline is spoken in U.S. dollars ($), deutschmarks (DM), euros (€), and British pounds (￡). This chapter can be read as a stand-alone case study, but the reader will benefit from also reading the chapters that came before it.

Siemens’ Sale of Sirona

We can understand Danaher’s acquisition of KaVo specifically, as well as the role of private equity and German business culture in general, if we first understand another relevant dental equipment company, Sirona. “Dental was the first market I identified as an attractive platform—specifically dental capital equipment,” said Dan Pryor , Danaher’s Corporate Vice President of Strategic Development since 2000. “We looked at Sirona three times but could not get our heads around it for various reasons and passed each time (in retrospect a mistake). We focused instead on their top competitor KaVo, which we felt was more aligned with what we were looking for.”

“A constant theme of European [mergers and acquisitions] in the 1990s has been the effort to refocus on core businesses, building these to critical mass through acquisitions while divesting non-core operations,” observed the Mergers & Acquisitions Journal. In 1997, 西门子 sold its electrical wholesaling chain, its technical lighting operations, its defense and electronics business, as well as Sirona. “This used to be a business for big companies,” said a spokesperson for Siemens when the company announced its decision to sell Sirona in April 1997. “Now it’s one for midsize firms.”

Siemens wanted out of the fragmented dental equipment industry but plenty of companies were interested in buying Sirona. J.P. 摩根 was Siemens’ advisor and led an auction that included 50 bidders in 1997. More than one-fourth of German mergers and acquisitions (M&A) activity was handled by J.P. Morgan, an American bank and considered the leader in “Anglo-Saxon M&A advice.” Permira , a private equity company formerly known as Schroder Ventures, bid the highest price and won the auction. They intended to take the company public in three to five years. Although the price was not initially disclosed, J.P. Morgan announced that it was the largest-ever management-buyout in Germany. Sirona generated annual revenue of DM900m before the acquisition. Permira later disclosed that it paid DM840m. In this transaction, Sirona had a 0.93 price-to-sales valuation. The purchase included Pelton & Crane , a business that Danaher later acquired.

Sirona’s Effect on Private Equity (1998-2004)

In the German capital market, the benchmark interest rate was derived from long-term government debt, known as Bundesanleihen (or “Bunds”). Sirona borrowed DM170m for 10 years at 440 basis points over 10-year Bunds in June 1998, giving “Europe’s hesitant junk bond market … a much-needed boost.” The bond also contained a 40% equity claw back, which could be useful if Sirona went public. Not only was Sirona influenced by the development of German capital markets, but it also contributed to that development.

Permira wrote-down the value of Sirona in 1998 and 1999 “due to difficulties in the restructuring of the dental distribution company, coupled with a downturn in the German dental market.” The private equity firm referred to the acquisition as a “classic investment bank-led auction,” and reverted to its preferred method of avoiding competitive auctions. In December 1999, Standard & Poor’s (S&P) downgraded Sirona’s long-term corporate credit ratings to B+ from BB- and unsecured notes to B- from B because of “an unexpected downturn in Sirona’s important domestic market, and the company’s failure to implement envisaged cost savings on the distribution side.” The ratings agency noted Sirona “operates in highly fragmented markets, with hardly any individual company able to build dominant market positions globally.” The ratings agency affirmed Sirona’s credit rating in August 2000, but downgraded its outlook to negative from stable, in part because “Demedis, the group’s distribution arm, is unlikely to become cash-positive over the next few quarters and Sirona’s manufacturing activities still fall short of expectations[.]” In November 2001, Permira reportedly hired 瑞银集团 to find a buyer for Sirona, which was now re-valued slightly above cost. “The Sirona investment will be seen as a failure for the firm, since private equity funds normally expect a return of more than 20 per cent per year on their investments,” explained the Sunday Telegraph.

Permira sold Sirona in November 2003 to Northern Europe Private Equity Funds ( EQT Group ) for €417.5m, with 15% being acquired by management. In the previous year, Sirona generated annual sales of €284m, so its price-to-sales valuation had increased from 0.93 times to 1.47 times. The sale did not include Demedis, Sirona’s distribution subsidiary, so the purchase price is not directly comparable. Demedis was combined with Euro Dental Holding to create a dental distribution company with annual revenue of €400m in fiscal 2003. In January 2004, Henry Schein , the largest U.S.-based dental distributor, bought the pair from Permira for €255m. “Through our Demedis acquisition, we became Sirona’s largest customer outside North America,” explained Mr. Stanley Bergman , CEO of Henry Schein. “Demedis [had] more of a focus historically on the Sirona brand, but they also sell KaVo, which we sell in the U.S., also,” said Steven Paladino, CFO of Henry Schein. Despite what happened in the years Permira held Sirona, it was able to take one business with a price-to-sales ratio of 0.93 times and sell it as two businesses with price-to-sales ratios between 0.64 and 1.47 times.

Danaher’s Activities While Sirona Was Bought and Sold (2001-2004)

If Danaher had bought Sirona in the early 2000s, Danaher might have developed in a very different way. Danaher proposed a merger with Cooper Industries in August 2001, valuing Cooper as high as $7b. Cooper’s board of directors rejected the offer and Cooper’s stock price traded at a sizeable discount to Danaher’s proposed price. Negotiations dragged on until the deal was called off in February 2002. Remember that Permira reportedly hired UBS to sell Sirona in November 2001. Danaher’s acquisition of Videojet Technologies in January 2002, which established the Product Identification platform, implies that it was in the market at that time to spend $400m on a platform-establishing transaction.

What was Danaher doing before EQT bought Sirona in November 2003? In September, Danaher signed a confidentiality agreement with Sybron Dental Specialties , a California-based company that generated revenue of $526m in its 2003 fiscal year. “We looked at Sybron [in 2003] but passed because of concerns about asbestos risk,” explained Mr. Pryor. More on Sybron later.

In October 2003, the Financial Times reported “Invensys is in talks with two bidders to sell its water metering unit, valued at up to Pounds 600m.” Danaher was reportedly “head-to-head with the management of the water meter business to win control.” 高盛 estimated the business unit was worth at least ￡504m. Instead, the business unit only sold for ￡388m to a private equity group. If Permira was aware of the Financial Times reporting on Invensys, it might have influenced its perception of Danaher’s interest in acquiring Sirona. The confusion about whether Danaher was bidding for Invensys’ metering business might have helped Danaher by creating a price ceiling and timeline for other transactions. Why pay more than €417.5m and 1.47 times sales to snatch Sirona away from EQT when Danaher was reportedly in talks to pay 1.0 times sales for Invensys’ water metering business with annual revenues of ￡550m (€788.4m)? When asked about Danaher’s engagement with Invensys, CEO Culp replied: “I would not believe everything you read in the FT.”

The sale of Sirona to EQT in November 2003 also coincides with Danaher’s establishment of the Medical Technologies reportable segment. On December 11, 2003, Danaher announced it had offered approximately $730m to acquire Radiometer , a Denmark-based business with $300m in annual revenue. Radiometer became Danaher’s first life sciences company and the first major operating company headquartered outside the United States. On the same day, Danaher announced the acquisition of Gendex, a dental imaging company, from Dentsply for $102.5m. Danaher was in the market at that time to spend $832.5m combined for two companies that could justify a European-based medical/dental technology platform. Not only was the total consideration lower for Sirona than Radiometer, but Sirona’s price-to-sales valuation was 1.47 times whereas Radiometer’s was 2.43 times. Danaher had the financial means and strategic reasons to acquire a company like Sirona in 2001 and 2003, but other opportunities presented themselves.

Danaher’s Acquisition of Gendex

“We have had our eye on the dental equipment market for some time … [and when Dentsply put Gendex] up for sale we were only too happy to have the opportunity to engage in that discussion,” said CEO Culp when the creation of the Medical Technologies reportable segment was announced.

Gendex was formed in 1983 to acquire 通用电气 ’s dental X-ray business. That year, GE CEO Jack Welch highlighted dental X-ray equipment as a slow-growing, low-margin product line. Gendex went public in 1987. In 1992, Gendex merged with Dentsply in a pooling of stock transaction. Gendex issued 13.8 million shares of common stock for all outstanding shares of privately held Dentsply. With a closing price of $42.75 that day, the deal was worth $590m.

Gendex’s trajectory changed dramatically after the merger. When the two companies merged, trailing annual sales were $85m at Gendex and $400m at Dentsply. ?Gendex accounted for 17.5% of combined sales. The Wall Street Journal reported Gendex held a 50% share of its market. When Dentsply announced the sale to Danaher 11 years later, Gendex’s revenues had only risen to $100m, representing an annualized growth rate of less than 1.5%. Dentsply generated consolidated revenue of almost $1.6b in 2003. ?Gendex’s share of the consolidated business had fallen from 17.5% to less than 6.4%. Gendex’s estimated market share fell from 50% to 20%. However, if Gendex’s revenue of $85m represented 50% of the market in 1992 and revenue of $100m represented 20% of the market in 2003, then Gendex’s estimated market had grown from $170m to $500m over 11 years, an annualized growth rate of 10.3%. Dentsply’s management had three reasons for neglecting Gendex in favor of the consumables part of the business: (1) Equipment sales were more volatile; (2) equipment sales had lower profit margins; and (3) equipment sales are dependent on dealers for extensive servicing. “We either needed to get into it in a bigger way, or get out of it,” recalled Dentsply’s CEO Gary Kunkle. Danaher’s acquisition made Gendex relevant again.

Danaher developed three types of acquisitions: Platform-establishing, adjacency, and bolt-on. The Medical Technologies reportable segment was presented as a platform to the outside world but was not. The establishment of the Medical Technologies reportable segment was announced with the simultaneous acquisitions of Radiometer and Gendex. However, Gendex was not an adjacency or bolt-on to Radiometer. The organizational structure also confirmed the difference. The head of Gendex reported to Philip Knisely , Senior Vice President, whereas the head of Radiometer, Peter Kürstein , reported directly to CEO Culp. “We communicated Medical Technologies as a platform to the outside world, but … it really had several distinct platforms,” explained Mr. Pryor. “Ideally, we would have bought Gendex after KaVo but the timing did not work, so we swallowed hard and took the risk of buying a stranded asset.”

KaVo as a Platform-Establishing Acquisition

The agreement to purchase KaVo was announced on March 29, 2004, less than four months after the planned acquisition of Gendex was announced. KaVo generated revenue of approximately $450m in 2003. The purchase price of $425m valued the company at 0.94 times sales. KaVo’s price-to-sales valuation was slightly lower than Gendex’s. When reflecting on the acquisition, CEO Culp said the dental equipment market had been on their radar for over three years, and “within that timeframe we obviously quickly saw that the KaVo business would be an outstanding platform business[.]”

KaVo was similar in size to Videojet, the platform-establishing acquisition for Danaher’s entry into the product identification industry. We can apply the six acquisition criteria that we learned in the Videojet chapter to KaVo. Danaher’s management believed the dental products market totaled $8b, with dental equipment contributing just under $3b. Thus, the dental equipment market fulfilled the first acquisition criteria related to market size exceeding $1b.

The second criteria related to growth stability. Danaher’s management believed the market had “seen consistent above-GDP growth” and “spending on dental services [in the U.S. had] increased at a nine percent compounded annual rate, while the worldwide dental equipment market [had] typically grown at five to seven percent.” Between 1999 and 2003, KaVo’s top line had grown six percent annually.

Danaher’s third acquisition criteria related to an industry having future bolt-on acquisition targets, called “long tail participants.” This criterion made fragmented markets appealing to Danaher. The previous acquisition of Gendex showed KaVo’s market had a long tail of participants. As CEO Culp noted, “Imaging is the only major equipment category KaVo does not participate in [and] Gendex is the worldwide leader in imaging.”

The dental equipment market lacked outstanding competitors, which was Danaher’s fourth acquisition criteria, in part because it was so fragmented. As CEO Culp explained, “it is a fragmented market both by the companies, but also by the product categories; we’ll see different people in different categories.” It helped that many major competitors were exiting the dental equipment market, because—in CEO Culp’s view: “they see the growth and profitability [in consumables] perhaps being superior to the equipment business.”

Danaher’s fifth acquisition criteria related to the ability to apply the Danaher Business System (DBS) to the acquisition target. KaVo’s customers were similar to customers of other Danaher businesses in that they “are highly skilled professionals whose performance is directly related to the equipment and materials they use.” Like Hach , Fluke Corporation , and Lange, CEO Culp considered KaVo to be a brand “where the family name is on the door, the family name is the brand,” but noted that “DBS clearly will have impact with respect to the manufacturing operations and we should see that with respect to inventory and working capital turnover.”

The sixth acquisition criteria related to the company having to sell tangible products. In the press release announcing the planned acquisition, Danaher’s management described KaVo as “a worldwide leader in the design, manufacture and sale of dental equipment, including handpieces, treatment units and diagnostic systems and laboratory equipment.”

KaVo met all six of Danaher’s acquisition criteria, but it took some convincing for Danaher to meet KaVo’s criteria as a buyer. The German market changed a lot in the decade spanning the late 1990s and early 2000s, but there were still a few special characteristics to navigate. In the late 1990s, the German market was secretive. “Many buy-outs are not publicised, and even big listed companies often choose not to attach a price to large disposals,” explained the Financial Times. Danaher might have benefited by being an industrial company instead of a private equity firm, but it still lacked industry expertise in dental equipment. “If we were going to see a chemical company, they would have insisted we brought chemists along,” recalled Mr. Thomas Krenz, managing director at Permira in Frankfurt. He was involved in the Sirona buy-out. If KaVo wanted a potential buyer to bring dental equipment specialists along, Danaher could at least bring Gendex staff.

“Danaher targeted dental equipment as a new growth platform and KaVo was at the top of its wish-list,” explained Mr. Florian Fautz, a member of the group that advised Danaher. “Because KaVo was a closely held family business, it was always going to be hard for a US company to establish meaningful contact.” One of the reasons Danaher hired Dresdner Kleinwort Wasserstein (DrKW) as sole financial advisor on the KaVo deal was because it had “longstanding relationship networks to open doors for a foreign buyer.”

Danaher completed the acquisition of KaVo on May 28, 2004. On February 28, 2005, it acquired DEXIS , a manufacturer of intraoral sensors that generated annual revenue of $30m. “The acquisition of DEXIS will significantly expand and strengthen our presence in the U.S. digital imaging segment with an established brand and product,” said CEO Culp during the earnings conference call for the first quarter of 2005.

“We reached an agreement with [KaVo’s] workers’ council and union in Germany [on April 8] and shortly should complete negotiations on the social plan,” announced CEO Culp in May 2005. “Implementation will begin at the end of next month and are important elements of our plan to improve KaVo’s cost competitiveness and operating margins.”

By 2007, KaVo had made operational improvements, but was beginning to show signs of underperformance compared to other Danaher integrations. Headcount reductions usually followed an acquisition. Danaher began itemizing headcount reduction plans for acquisitions after 2002. Some headcount reduction plans were revised down, such as at Viridor, Gilbarco Veeder-Root , and Thomson Industries, Inc . Almost all of the headcount reduction plans were completed by the end of the next calendar year after the acquisition. At KaVo, in contrast, the headcount reduction plan was revised up, to 553 associates from 325 associates. The restructuring also dragged on past the next calendar year.

Danaher developed eight core value drivers as a uniform set of metrics to track performance across its dozens of operating companies in different industries. Two of the eight were customer-focused: External quality and on-time delivery (OTD). “KaVo was not used to working at a very high rate of on-time delivery to the customer,” said Alexander Granderath , Group Executive responsible for KaVo, at the 2007 Danaher Analyst Meeting. “We have improved that dramatically with the use of DBS, from 65% to 80% …, doing more than 100 kaizens at the KaVo plant.”

“[OTD] was not even being measured at the time we acquired [KaVo],” explained Mr. Knisely. Although getting from 65% to 80% was an achievement, Danaher expected operating companies to be closer to 99% OTD.

“DBS variation reduction tools helped us to improve quality, [taking] external defect rates down as well as internal defect rates,” added Mr. Granderath, commenting on the other customer-facing core value driver.

Sirona’s Response to a Changing Industry

How did EQT respond to Sirona’s changing industry? EQT held Sirona for less than 18 months before selling it to another private equity firm, this time to Madison Dearborn Partners, LLC for €800m. Sirona generated revenue of €320m, so it now had a 2.5 price-to-sales valuation.

When a private equity firm acquires a company, it is usually in the form of a leveraged buyout. When a private equity firm sells its holdings to another private equity firm, it is called a secondary buyout. When that second private equity firm again resells to another private equity firm, it is called a tertiary buy-out. Sirona not only had the distinction of being Germany’s largest private equity buy-out when it was bought from Siemens but was also Germany’s first sizeable tertiary buy-out.

Madison Dearborn Partners’ leveraged buy-out transaction to acquire Sirona closed on June 30, 2005. The sale of Pelton & Crane to Danaher for $85m was announced five days earlier. The business generated revenues of $80m in the previous year, so it was valued at 1.06 times sales. Notably, neither Danaher’s press release nor any media reports about the Pelton & Crane transaction indicated who the seller was.

In September 2005, Sirona announced a merger with Schick Technologies in a transaction valued at $1.9b. Prior to that announcement, Schick Technologies CEO Jeff Slovin , in earnings conference calls, referred to Danaher’s role in consolidating the industry. “[The year 2005] also saw the continued consolidation of the dental equipment market with Danaher adding DEXIS to its previous acquisitions of KaVo and Gendex, all within the past 18 months,” he said. “As far as we can tell the indications are that the trend towards consolidation in the marketplace is likely to continue as the market matures.”

Schick issued almost 37 million shares of its common stock in exchange for 100% of Sirona equity and a promissory note worth €151m. That allowed Sirona’s shareholders to own approximately two-thirds of the combined entity, leaving the remainder to Schick shareholders. Before the transaction, Schick shareholders owned 100% of a business generating annual revenue of $57m. After the transaction, Schick shareholders would own about 33% of a business generating annual revenue of $498m (equating to $163.3m). We can equate that to a 2.88 price-to-sales re-valuation.

In the fiscal year earnings conference call that took place in May 2006, Mr. Slovin again referenced Danaher’s acquisition of KaVo and Gendex, this time also mentioning Pelton & Crane. He did not mention Sirona’s relationship to Pelton & Crane. “We believe that the trend towards consolidation in the marketplace is likely to continue into the foreseeable future as the market grows,” he said in prepared remarks. “We believe that our merger with Sirona will position us to take advantage of opportunities which the market consolidation may offer.”

Danaher’s Acquisition of Sybron

Beginning in 2005, Danaher’s management began to speak openly about putting $5b worth of capital to work to grow the business over the next three years. That number came from hundreds of millions of dollars in cash on the balance sheet, more than $1b free cash flow generated annually over three years, and the rest made up with new debt. “And that obviously would be $5 billion before additional funds that might come to us by way of divestitures, additional cash flows from any acquisitions we might make in the interim, let alone, if we were to use the stock as currency,” explained CEO Culp. When Danaher announced it had authorization to repurchase its own shares, management had to re-iterate that its capital allocation strategy was not changing. Capital allocation in 2005, however, was noticeably different from previous years. Danaher spent $885m on acquisitions (primarily $429m for Leica Microsystems ), repaid $362m worth of 6.25% Eurobond notes that were issued in July 2000, and spent $258m repurchasing its own shares. Despite describing the balance sheet as “very underleveraged,” the balance sheet continued to be deleveraged that year. The debt to total capital ratio dropped to 17% at the end of 2005, which was less than half the ratio at the end of 2001.

Danaher announced the $2.2b acquisition of Sybron on April 12, 2006. Sybron generated $650m in the prior fiscal year, so it was acquired at a 3.39 price-to-sales valuation. Not only was the purchase price a new record for Danaher, but the price-to-sales valuation was also high. Danaher was going big on the Dental platform.

Sybron’s FY2005 revenues were split between its Professional Dental reportable segment, contributing 52.6% of revenue, and its Specialty Products reportable segment, contributing 47.4%. The Professional Dental segment was anchored by Kerr Dental and the Specialty Products segment was anchored by Ormco . Kerr was bought by a predecessor company of Sybron in 1964 through a stock-for-stock exchange valued at $2.1m. Kerr generated annual revenue of about $5.1m at that time, so it was acquired at a price-to-sales valuation of 0.41 times. Ormco became part of Sybron in 1982 when Sybron acquired American Hospital Supply Corporation’s dental manufacturing and distribution operations. Those business units generated annual revenue of $94m and were acquired for $90m, giving them a consolidated price-to-sales valuation of 0.96 times. The actions taken by Sybron’s management over the next few decades brought the overall company up to a (minimum) 3.39 price-to-sales valuation.

CEO Culp first met Floyd Pickrell, his counterpart at Sybron, in 2001 through an introduction by Emmet Stephenson, a member of Danaher’s board of directors, but they did not discuss a merger of the two companies. On August 18, 2003, Sybron hired investment bank UBS to advise on strategic alternatives, including a potential sale of the dental products company. UBS created a list of companies that might be interested in acquiring Sybron. Danaher was on that list and was contacted, leading to a confidentiality agreement signed on September 26, 2003. Danaher began its due diligence, which included confidential information and access to the management team. Discussions continued for seven months, but no agreement was reached. Sybron continued with its strategic plan as an independent, publicly traded company.

The two CEOs met for dinner in February 2005 and 2006 for the dental trade show held in Chicago. During the 2006 dinner, CEO Culp told Mr. Pickrell he was still interested in acquiring Sybron. That was followed by a phone call on March 6 and a new confidentiality agreement on March 13. In a telephone call on March 18, CEO Culp expressed a “non-binding indication of interest in buying [Sybron] for $42.50 per share in cash.” Sybron hired investment bank 瑞信 as its financial advisor and Hughes Hubbard & Reed LLP (“Hughes Hubbard”) as its legal counsel.

Excluding price, there are three significant terms in a takeover proposal. The first is the amount of due diligence remaining. An acquirer with less familiarity with a business (or industry) will take longer to complete due diligence than one with more. Related to due diligence is anti-trust risk. A proposed merger might not receive anti-trust approvals quickly or might trigger legal issues later. The third term is exclusivity, meaning the seller’s ability to negotiate with other buyers at the same time.

In March 2006, Sybron also entered into confidentiality agreements with two other companies. In filings with the U.S. Securities and Exchange Commission (SEC), it referred to them as only “Company A” and “Company B.”

To understand the potential list of buyers for Sybron, we can start with the competitors it names in its annual report. The Professional Dental segment only had three named competitors: Dentsply, 3M ESPE, and Ivoclar Vivadent. Dentsply was a publicly listed company and had previously sold Gendex to Danaher in order to focus more on consumables, so it was interested in future acquisitions. 3M 公司 was a publicly listed conglomerate, but acquisitions were not a major part of its growth strategy. It acquired ESPE Dental AG in 2001, paying an implied total consideration of $269m. That business generated annual revenue of about $150m when it was acquired, giving it a 1.79 price-to-sales valuation. Between the purchase of ESPE in 2001 and Danaher’s acquisition of Sybron in 2006, 3M did not acquire any other dental products companies. Ivoclar Vivadent was a Liechtenstein-based, privately held manufacturer of dental products. It reported consolidated sales of $430.2m in 2004. All three companies had the financial means to acquire all of Sybron, with the most strain likely being placed on Ivoclar Vivadent, the smallest.

Sybron’s Specialty Products segment had five named competitors. Two of them also competed with the Professional Dental segment: 3M (through Unitek) and Dentsply (through GAC International). The other three were American Orthodontics , Nobel Biocare , and Straumann Group . American Orthodontics was probably too small to swallow Sybron whole. Nobel Biocare and Straumann were Swiss-based and combined accounted for half of the $1.4b global market for dental implants. They had the financial means to acquire all of Sybron.

Nobel Biocare preferred to acquire the intellectual property for specific products, not whole companies. “We [were] looking into opportunities with a strong intellectual property and which could really enhance our portfolio,” explained Nobel Biocare CEO Heliane Canepa. “That does not just mean you need acquisitions. There are lots of other inventions coming on the buy.”

Straumann, in contrast, needed to acquire a larger U.S.-based salesforce, not more products. Straumann CEO Gilbert Achermann explained the issues of developing a salesforce in a fragmented industry:

“[It takes several years] until a sales rep. reaches their peak performance … because it is a hugely fragmented customer base that you need to address. [It is a somewhat painful learning curve] until you understand your territory, until you understand the product, until you understand competitive products; all these things take time.”

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Mr. Achermann did not think Straumann had the ability to close the gap with Nobel Biocare in the United States organically. “We are not looking at buying smaller competitors that would not bring any benefit, because we continue to believe that from a portfolio perspective we have everything in place that we need to successfully grow,” he explained in 2006. “We are looking at other alternatives, but they need to make sense strategically and they need to be—from a valuation perspective—digestible and attractive and hence create shareholder value.”

Between April 7 and the morning of April 10, Sybron received three proposals from the bidders, summarized in the table below.

Company B offered the highest price but came with the worst combination of conditions. Danaher offered the lowest price but came with the best combination of conditions. Company A was in between. Sybron had about 40.6m shares outstanding, so a 70-cent difference in price per share equated to $28.4m total, a $2.50 difference in price equated to $101.4m, and a $3.20 difference in price equated to $129.8m. Was 15-30 days of exclusivity worth $28.4m? Were the combined differences in remaining due diligence, anti-trust risk, and exclusivity between the best case (Danaher) and the worst case (Company B) worth $129.8m?

During a phone call with Mr. Pickrell in the afternoon of April 10, CEO Culp raised Danaher’s offer to $47 per share. A $1.70 difference in price per share equated to $68.9m total. Sybron’s board of directors agreed to Danaher’s revised offer, implying they viewed the other three terms that Danaher offered offset the $68.9m difference in total consideration.

Sybron’s stock price closed at $41.74 on April 11, 2006, the day before the $47-per-share deal was announced. After the deal was announced, the stock price closed at $46.81, leaving a 0.4% pre-acquisition discount. Once Sybron filed its Schedule 14D-9 with the SEC, explaining the background of the merger (and disclosing the two other higher offer bids), Sybron’s stock began trading above Danaher’s offer price. Its closing price was $47.55 on April 19 and remained above $47 every trading day until May 4. “The documentation that [Sybron] filed clearly, I think, encourages us. There are no other firm offers out there,” explained CEO Culp during an earnings conference call on April 20, 2006. “The other parties … clearly admitted they had more work to do and they have significant regulatory hurdles.” No other public bids were made for Sybron. Danaher’s acquisition of Sybron was completed on May 19, 2006.

When asked about Danaher’s acquisition of Sybron on the conference call to discuss Dentsply’s first quarter of 2006 results, Mr. Kunkle said: “I don’t think that was a surprise to anyone.” In 2005, Dentsply generated $1.7b revenue and described itself as “the world's largest designer, developer, manufacturer and marketer of a broad range of products for the dental market.” In less than two years, Danaher had entered the dental market and created a strategic platform that was within striking distance of becoming the world’s largest dental product manufacturer.

Other Acquisitions in the Dental Platform (2004-2009)

The chapter on Hach and the Water Quality platform introduced Danaher’s three types of acquisitions: Platform-establishing, adjacency, and bolt-on. The chapter on Videojet and the Product Identification platform combined those three types of acquisitions with business theory’s three types of mergers: Conglomerate, horizontal, and vertical. Among the nine possible combinations of acquisitions and mergers, only five are relevant to Danaher’s platform strategy: Conglomerate platform-establishing, horizontal adjacency, horizontal bolt-on, vertical adjacency, and vertical bolt-on.

Gendex was acquired before KaVo, but we can classify it as a horizontal adjacency. Pelton & Crane was also a horizontal adjacency. DEXIS was the first horizontal bolt-on completed in the Dental platform.

Imaging Sciences International (ISI) was acquired in January 2007. It generated revenue of $50m from selling three-dimensional (3D) imaging systems to oral surgeons, periodontists, orthodontists, and general dental practitioners. That month, Danaher also acquired the assets of Dentrix Imaging, a manufacturer of imaging software and sensors, to complement the DEXIS intraoral product line. Another bolt-on in the Dental platform was Pentron. It was acquired in 2008 to complement Kerr’s endodontic and restorative product lines.

KaVo made two vertical acquisitions in 2008. In the first quarter, it acquired Shirokusa Dental Supply Works, the exclusive distributor of KaVo products in Japan. One skill set that the management of Radiometer brought to Danaher was experience (both good and bad) acquiring Japanese distributors. It acquired one in 1991 and another in 1992. Those activities helped Radiometer hold 25% of the installed base in Japan, the world’s second largest in-vitro diagnostics market after the United States, in 2003. Even though they were separate operating companies, KaVo and Radiometer could learn from each other by being part of Danaher.

In the second quarter of 2008, KaVo acquired Infrared Fiber Systems (IFS), which CEO Culp described as “a small producer of optical fibers for laser power transmission in dental applications, including hard tissue lasers.” This was the only example of a vertical bolt-on in the first five years of the Dental platform.

Danaher acquired Leica Microsystems in 2005 and established the Life Sciences platform. Leica Microsystems also had a dental products business line. “They have not invested in [their dental product portfolio] largely because they don’t have a channel to market,” said CEO Culp. “Obviously, with KaVo, we have an outstanding channel to market on a worldwide basis.”

Leica Microsystems’ dental products were marketed through KaVo but were not integrated into the Dental platform. Even after Danaher divested the Dental platform as Envista Holdings Corporation , Leica Microsystems still provided dental products. If Leica Microsystems’ dental products had been integrated into the Dental platform, it would have been a horizontal merger but could have been either an adjacency or a bolt-on.

Danaher’s classification of acquisition targets into platform-establishing, adjacency, and bolt-on provided a durable framework. The playbooks that resulted from integrating those acquisitions, though, were not rigid.

The Dental Platform’s Similarities and Differences

By the time the Dental platform was established, Danaher had varying degrees of success building out strategic platforms. Both the successes and struggles provided lessons for the Dental platform.? “The businesses that are the real stars of the portfolio … Hach-Lange in [Water Quality], Fluke and Fluke Networks in Electronic Test—even Videojet in Product Identification—there is a lot of work that goes on in the first couple years,” explained CEO Culp. “And it frankly … takes a little longer, and it’s a little more expensive to do that work in Europe.”

All acquisitions covered in the chapter about the Water Quality platform were horizontal mergers. Each one was related to a company Danaher already owned. Hach is considered the platform-establishing acquisition because it was large, but it came after the acquisitions of American Sigma, Lange, and others. U.S.-based Hach was merged with Germany-based Lange to create Hach-Lange. Combining an American market leader with a European market leader to create a global market leader was a playbook that was re-used to create KaVo Kerr.

Danaher acquired Pacific Scientific in 1998 and used it to establish the Motion platform. Over the next two years, Danaher added Sweden-based Atlas Copco Controls (later renamed InMotion Technologies), American Precision Industries (API), Kollmorgen , and the motion control business of Warner Electric Company. In the fourth quarter of 2001, the Motion platform became Danaher’s “most economically challenged” platform as revenue declined 20% year-over-year in the quarter.

The Motion platform taught Danaher two lessons: One about follow-on acquisition integration and the other about industry attractiveness. “Danaher acquired a bunch of similarly sized companies, and integrating them all was ferociously complex,” explained Mr. Pryor. Until the mid-2000s, many of Danaher’s acquisitions were opportunistic acquisitions. Based on the appeal of the financials of those specific acquisition targets, Danaher ended up in certain industries, such as motion control. Danaher’s management transitioned towards starting with industry attractiveness. Non-cyclical industries were more attractive than cyclical industries. After a segment of an industry was identified as a place Danaher wanted to be, acquisition targets were identified. Then the conversation was about valuations. The script was flipped.

Also in 1998, Danaher acquired Fluke and used it to establish the Electronic Test platform. “While Fluke was acquired before Videojet …, the follow-on deals that turned it into a platform really didn’t start until after Videojet,” said Mr. Pryor. Fluke was a prolific bolt-on and adjacency acquirer in the first five years of being owned by Danaher. The lack of large follow-on deals, however, meant it was more of just a major operating company than a platform anchor during that period.

Videojet was a conglomerate platform-establishing acquisition in 2002. Accu-Sort was an example of a horizontal adjacency. Willett was an example of a horizontal bolt-on. LiteLaser was an example of a vertical bolt-on. Within the first five years of establishing the platform, there were no vertical adjacencies. An example of a vertical adjacency would be acquiring a distributor, such as KaVo’s acquisition of Shirokusa.

The Product Identification platform also lacked a major adjacency acquisition in the first five years. The largest follow-on acquisition during that period was the $171m acquisition of Linx Printing Technologies . That total consideration was less than half the $400m paid for Videojet. In contrast, the purchase price for Sybron ($2.2b) was 5.4 times larger than for KaVo ($406m).

With Danaher investing so much capital into dental acquisitions, an unfortunate difference between the Dental platform and others is that it did not achieve Danaher’s return on invested capital (ROIC) target. For platform-establishing acquisitions, Danaher targets greater-than 10% after-tax ROIC within five years. Other types of acquisitions are given three years to hit that target. “[Videojet] hit that number in three years, so it performed like a bolt-on,” boasted CEO Culp.

The five-year anniversaries of the Gendex and KaVo acquisitions were February 27 and May 28, 2009, respectively. Results from 2008 can be used as a proxy for the Dental platform’s five-year mark. That year, Danaher generated 10.6% ROIC. At the division level, a proxy for ROIC is operating profit divided by identifiable assets. Danaher’s consolidated operating profit divided by identifiable assets was 10.7% in 2008. The Environmental reportable segment, which included the Water Quality platform and Gilbarco Veeder-Root, generated the highest operating profit as a percent of identifiable assets, at 19.6%. The Dental reportable segment generated the lowest number, at only 5.2%. In other words, for every $1 Danaher invested in identifiable assets in the Environmental reportable segment, it got back almost 20 cents of operating profit. That same $1 put into the Dental reportable segment only generated a little more than five cents in operating profit.

“We’re not happy where we are with the margin in dental equipment. … We did a fair amount of restructuring in the fourth quarter,” said CEO Culp at a conference in February 2009. “There will be more restructuring to come in dental equipment to get it to more appropriate and more profitable business[.]”

Unfortunately for KaVo, the world economy was contracting in 2008 and 2009. That was not the main driver of KaVo’s underperformance, though. “Where we [are] seeing pressure is clearly on the KaVo side of the business. We haven’t executed well there and we know we have some time to make up for, but that’s not the economy,” explained CEO Culp in November 2009. “That’s just us.”

In the first quarter of 2009, core dental revenues declined at “a mid-single-digit rate.” The consumables business grew, but “KaVo revenues declined at a low teens rate in the quarter, … with a general slowing across all major geographies and product categories.”

“We’ve been pretty public … that we’re in no way satisfied with where we are [at KaVo]. I think the opportunities are both at the gross margin line and within [selling, general, and administrative (SG&A) expenses],” emphasized CEO Culp in May 2009. “It’s a factory issue, it’s a sourcing issue, and in some cases, frankly, it’s a design issue.”

At the 花旗 Industrials Conference in November 2009, Jeffrey Sprague, the host of the conference, asked: “Was there something about KaVo? Was it Germany? Was it the management team? Was it the business?”

CEO Culp replied: “We learned a long time ago that the most important task in a good integration is getting the leadership equation right at the outset. We could’ve done a better job there. When you get that wrong other things happen, but fundamentally you end up delaying the work and the trajectory and the progress that is always the hallmark of a good Danaher integration.”

The Dental Platform’s Impact on Competitors

If ROIC is the standard for success, then Sirona did not fare much better than KaVo. Sirona’s ROIC in FY2007 was 4.8% and declined to 2.4% in FY2008. Dentsply, in contrast, generated ROIC of about 13% and 14% in 2007 and 2008, respectively. Its ROIC exceeded Danaher’s consolidated number.

Madison Dearborn Partners paid over $1b for Sirona in 2005. In six transactions between August 2009 and May 2011, it sold its entire holdings of Sirona shares for aggregate proceeds of $1.4b. Perhaps it would have preferred a faster exit with a higher return, but Danaher’s efforts to consolidate the dental equipment industry did not cause the valuation of the other market leader to decline.

Danaher announced the acquisition of Nobel Biocare for $2.2b on September 14, 2014. Dentsply issued $5.5b worth of shares to merge with Sirona in a stock-for-stock exchange, completed February 29, 2016. The merged companies became Dentsply Sirona . On July 19, 2018, Danaher announced a plan to spin off its dental businesses into an independent, publicly traded company. That spin-off company was later named “Envista Holdings Corporation.” Mr. Amir Aghdaei was the inaugural CEO. Danaher sold 19.4% of Envista as part of an initial public offering (IPO) that raised $643.4m in September 2019. In December of that year, Danaher exchanged $3.4b worth of its own shares for the remaining 80.6%. Danaher’s 16-year adventure in the dental industry came to an end.

Conclusion

This case study covered Sirona’s transformation as Danaher built a strategic platform around KaVo. The period covered was the late 1990s until the late 2000s. Danaher’s six acquisition criteria were applied to KaVo. The sales processes for KaVo and Sybron explored Danaher’s appeal as a buyer. Two customer-facing core value drivers were introduced, on-time delivery and external quality. These topics built on the lessons learned from Danaher’s creation of the Water Quality platform and the Product Identification platform. Although Danaher was able to create a strategic platform in an industry that other major players wanted out of, the result was underwhelming compared to its own standard of success.

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[2] Correspondence dated March 17, 2024.

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[7] Reuters . “Schroder Ventures makes first European investments.” January 9, 1998.

[8] Boland, Vincent; Luce, Edward. “High-yield deal from Sirona.” Financial Times. June 30, 1998.

[9] Regulatory News Service. “Schroder Ventures Interim Results.” March 7, 2000.

[10] Katharine Campbell . “Rainmaker with a Feel for a Deal.” Financial Times. January 28, 1999.

[11] Capital Markets Report. “Sirona Dental Systems Corp Rtg Cut to B+ From BB-.” December 1999.

[12] Capital Markets Report. “Sirona Rtg Outlk Down to Negative From Stable.” August 15, 2000.

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[14] Reuters. “Permira Sells Dental Firm Sirona for 417.5 mln Euros.” November 10, 2003.

[15] German News Digest. “U.S. Henry Schein Buys Demedis, EDH for 255 Mln Euro.” January 9, 2004.

[16] Fair Disclosure Wire. “Q4 2004 Henry Schein Earnings Conference Call.” March 1, 2005.

[17] Fair Disclosure Wire. “Henry Schein Expands International Presence Through Acquisition of Leading European Dental Distributors.” January 9, 2004.

[18] Correspondence dated March 17, 2024.

[19] Davoudi, Salamander; Lina Saigol . “Invensys is close to selling water metering business.” Financial Times. October 15, 2003.

[20] Richard Wray . “Invensys meter sale disappoints investors.” Guardian. October 22, 2003.

[21] On the day the Financial Times article appeared in October 2003, the pound was worth €1.4335, so Invensys was reportedly valued at €788.4m.

[22] Fair Disclosure Wire. “Q3 2003 Danaher Earnings Conference Call.” October 17, 2003.

[23] Fair Disclosure Wire. “Danaher Conference Call to Discuss Tender Offer for the Shares of Radiometer A/S.” December 11, 2003.

[24] Marcus, Steven J. “G.E. Sets a Record; Raytheon Falls 9.3%.” 纽约时报 . July 15, 1983.

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[27] Miller, James P. “Gendex Corp. Plans to Buy Dentsply in a Stock Deal.” Wall Street Journal. December 18, 1992.

[28] Dentsply International Form 10-K for the year ended December 31, 2003.

[29] David Dagan . “That’s a Mouthful.” Central Penn Business Journal. Vol. 21, Iss. 12 (March 18, 2005): 3.

[30] Correspondence dated March 17, 2024.

[31] Fair Disclosure Wire. “Danaher Corporation Announces Agreement to Purchase Kaltenbach & Voigt GmbH (‘KaVo’) Conference Call.” March 29, 2004.

[32] Financial Times. “Try-outs for German Buy-outs.” January 20, 1998.

[33] Michael Marray . “Team of the Month.” The Banker . May 1, 2004.

[34] Fair Disclosure Wire. “Q1 2005 Danaher Earnings Conference Call.” April 21, 2005.

[35] Fair Disclosure Wire. “Q1 2005 Danaher Earnings Conference Call.” April 21, 2005.

[36] Fair Disclosure Wire. “Danaher Analyst Meeting.”

[37] Business Wire . “Schick Technologies to Merge With Sirona Dental Systems; Transaction Valued At $1.9 Billion.” September 26, 2005.

[38] Fair Disclosure Wire. “Q4 2005 Schick Technologies Earnings Conference Call.” June 10, 2005.

[39] Fair Disclosure Wire. “Q4 2006 Schick Technologies Earnings Conference Call.” May 25, 2006.

[40] Fair Disclosure Wire. “Danaher at The Electrical Products Group of New York 2005 EPG Conference.” May 16, 2005.

[41] New York Times. “Dental-Wax Maker Acquired by Ritter.” January 22, 1964.

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[43] New York Times. “Sybron to Buy Dental Units.” March 18, 1982.

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[45] Reuters. “3M in Venture with German Dental Products Maker.” October 4, 2000. If ESPE Dental AG had a total consideration of $269m, then it was acquired at a price-to-sales valuation of 1.79 times.

[46] Liechtenstein News Digest. “Liechtenstein News in Brief - Ivoclar Vivadent, Hotelplan, Casino Bregenz.” January 25, 2005.

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[48] Fair Disclosure Wire. “Nobel Biocare Full Year 2004 Report Presentation.” February 10, 2005.

[49] Fair Disclosure Wire. “Interim 2006 Straumann Earnings Conference Call.” August 11, 2006.

[50] Fair Disclosure Wire. “Q3 2006 Straumann Sales Conference Call.” October 25, 2006.

[51] Fair Disclosure Wire. “Q1 2006 Danaher Earnings Conference Call.” April 20, 2006.

[52] Fair Disclosure Wire. “Q1 2006 Dentsply International Inc. Earnings Conference Call.” May 4, 2006.

[53] Dentsply International Form 10-K for the year ended December 31, 2005.

[54] Fair Disclosure Wire. “Q4 2006 Danaher Earnings Conference Call.” January 25, 2007.

[55] Fair Disclosure Wire. “Q3 2008 Danaher Earnings Conference Call.” October 16, 2008.

[56] Fair Disclosure Wire. “Q1 2008 Danaher Earnings Conference Call.” April 17, 2008.

[57] Wells, John; Galen Shaffer . “Radiometer, 2003.” 美国哈佛商学院 . Case 9-715-409. September 3, 2014.

[58] Fair Disclosure Wire. “Q2 2008 Danaher Earnings Conference Call.” July 17, 2008.

[59] Fair Disclosure Wire. “Danaher Merger & Acquisition Announcement of Definitive Agreement to Acquire Leica Microsystems.” July 1, 2005.

[60] Fair Disclosure Wire. “Danaher at Goldman Sachs Global Capital Goods Conference.” November 2, 2005.

[61] Correspondence dated March 10, 2024.

[62] Correspondence dated March 10, 2024.

[63] Fair Disclosure Wire. “Danaher at The Electrical Products Group of New York 2005 EPG Conference.” May 16, 2005.

[64] Fair Disclosure Wire. “Danaher at Barclays Capital Industrial Select Conference.” February 9, 2009.

[65] The National Bureau of Economic Research (NBER) estimates the United States economy peaked in December 2007 and contracted until a trough in June 2009.

[66] Fair Disclosure Wire. “Q1 2009 Danaher Earnings Conference Call.” April 23, 2009.

[67] Fair Disclosure Wire. “Danaher at 美国银行 Securities Healthcare Conference.” May 14, 2009.

[68] Fair Disclosure Wire. “Danaher at Citi Industrials Conference.” November 12, 2009.

[69] Michael de la Merced . “Dentsply to Acquire Sirona Dental for $5.5 Billion.” New York Times. September 15, 2015.