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Danaher Corp. (NYSE:DHR) announced last week that it will acquire IRIS International (NASDAQ:IRIS) in a deal valuing the company at $338 million. Shares of IRIS jumped over 45% in a reaction to the deal and ended the week at $19.47, three cents below the offering price. Shares of Danaher ended the week flat.

The Deal

Danaher announced that it will acquire IRIS International, a leading manufacturer of automated in-vitro diagnostics systems and consumables.

Danaher will pay $338 million for the company. This includes the debt outstanding by IRIS and is net of the cash acquired. The gross acquisition price is $352 million.

IRIS generated annual revenue of $118.3 million for 2011, on which the company net lost $1.2 million. Revenue for the first six months of 2012 came in at $60.8 million, on which the company net earned $2.1 million. Full-year revenue is expected to increase by 9%. The deal values IRIS at roughly 2.9 times annual revenue.

Danaher expects to close the deal in the fourth quarter of 2012. The deal is subject to regulatory and shareholder approval. The Board of Directors of IRIS has already unanimously recommended the deal. Upon completion, IRIS will become part of Danaher's Beckman Coulter Diagnostics business.

Valuation

Danaher ended its second quarter of 2012 with $1.12 billion in cash and equivalents. The company operates with $4.90 billion in short and long-term debt, for a net debt position of roughly $3.78 billion.

For the first six months of its fiscal 2012, Danaher generated revenue of $8.9 billion. The company net earned $1.21 billion, or $1.57 per diluted share. For the full year, the company expects to earn between $3.19 and $3.26 per diluted share.

Valued at $38.2 billion, the market values the firm at roughly 2.0 times annual revenue and 17 times annual earnings.

Currently, Danaher pays a small quarterly dividend of $0.03, for an annual dividend yield of 0.2%.

Investment Thesis

Year to date, shares of Danaher trade with gains of roughly 17%. Shares quickly rose from $47 in January to $56 in April. From that point in time, shares have traded within a tight trading range between $50 and $55. On Friday, shares closed near the high end of the range at $55.

Over the past five years, shares have returned some 33%. Shares fell to lows of $25 in the beginning of 2009, but have more than doubled from that point in time. Shares are currently trading near their all-time highs. As a result of acquisitions, revenue has grown from $12.7 billion in 2008 to an expected $18 billion in 2012. Net income rose from $1.3 billion in 2008, to a guided $2.3 billion in 2012. The growth in earnings per share came in a little lower as the number of shares outstanding increased by roughly 5% over the time period.

The acquisition of IRIS hardly has an effect on Danaher's business. The addition adds about 0.7% in annual revenue and might have a slight dilutive effect on earnings, although nothing substantial.

The deal does highlight Danaher's strategy of making acquisitions into the medical diagnostics market. Last year, Danaher bought Beckman Coulter in a $5.8 billion deal to boost its presence in the field. The latest deal is rather small, but builds on the company's strategy as Danaher said it might spend another $5 billion on mergers and acquisitions in the next two years.

Despite the acquisition spree, Danaher's financial position is very solid and the debt position is very manageable. The deal once more reiterates Danaher's strategy and investors are applauding the deal-making aspirations of the company. While shares hardly moved on the back of this specific takeover of IRIS, it confirms the acquisition-driven growth strategy. Danaher has built a reasonable track-record on acquisitions, comforting investors.

Shares might offer a little more upside for investors, as I would not be surprised if Danaher would continue to set new all-time highs around $60 later this year. In the meantime, expect more little additive acquisitions.

Source: Danaher Corp - Acquisition Of IRIS Underscores The Company's Acquisition Strategy