3M’s Biggest Deal Could Turn Out to Be a Badly Timed Distraction

(Bloomberg Businessweek) -- Industrial conglomerate 3M Co. agreed in May to acquire surgical wound-care company Acelity Inc. for $6.7 billion in a deal set to close later this year. By far the biggest purchase in 3M’s 117‑year history, it comes at a time when the company is at a crossroads. Long regarded as a reliable operator that could offer haven to investors during times of economic strife, it’s announced a string of earnings and sales guidance cuts over the past year, including one just weeks before the Acelity acquisition was unveiled.

3M admitted to operational missteps that exacerbated the earnings pressure from slumping demand in China and weak automotive and electronics markets. And although the company spends a higher percentage of its revenue on research and development than most peers, it hasn’t had much to show for it lately. The Acelity takeover signals a new—but risky—strategy by 3M to buy its way to better growth.

Acelity isn’t a bad fit strategically. While perhaps best known for Post-it notes, 3M also has a $7 billion health-care unit that sells medical tapes, skin closures, and dental tools, among other things. Acelity is growing fast, notching a 10% sales gain in 2018 excluding the impact of currency swings. But the timing of the deal was bizarre. Acelity had filed to go public just weeks before it was announced, and 3M appears to have paid a rich price to persuade the company to sell instead.

More important, the transaction feels like a distraction as 3M grapples with deterioration in some of its top markets. Industrial distributor Fastenal Co. set off alarm bells across the sector this month when it reported its weakest stretch of daily sales growth since 2017. Meanwhile, data from the Institute for Supply Management showed new U.S. factory orders stalled in June. That raises the odds that 3M will again have to cut its 2019 guidance when it reports earnings on July 25. Managing the integration of the company’s biggest-ever deal on top of that will be tough.

To help fund the purchase, 3M is restricting its spending on share buybacks to a maximum of $1.5 billion this year, down from a previous target of as much as $4 billion. With 3M shares having recently flirted with a three-year low, shareholders may wish management had held on to some of that firepower to slow further slides in the stock.

15x

Medical Bills

The acquisition agreement values Acelity at about 15 times its adjusted 2018 earnings before interest, taxes, depreciation, and amortization.

Price Therapy

3M plans cost cuts that would make the Acelity purchase price slightly easier to justify, but estimates of the savings may be ambitious.
 
Sutherland is a deals columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

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