Bloomberg Businessweek - USA (2019-07-29)

64

ILLUSTRATION

BY

GEORGE

WYLESOL

Bloomberg

Businessweek

(USPS

080

900)

July 29,

2019

(ISSN

0007-7135)

S

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no.

4623

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Industrialconglomerate3MCo.agreed

inMaytoacquiresurgicalwound-care

companyAcelityInc.for$6.7 billionin

a dealsettocloselaterthisyear.Byfar

thebiggestpurchasein3M’s117-year

history,it comesata timewhenthe

company is at a crossroads. Long

regardedasa reliableoperatorthat

couldofferhaventoinvestorsduring

timesofeconomicstrife,it’sannounced

a stringofearningsandsalesguidance

cutsoverthepastyear,includingone

justweeksbeforetheAcelityacquisi-

tionwasunveiled.

3Madmittedtooperationalmisstepsthatexacer-

batedtheearningspressurefromslumpingdemandin

Chinaandweakautomo-

tiveandelectronicsmar-

kets.Andalthough the

companyspendsa higher

percentageofitsrevenue

onresearchanddevelop-

mentthanmostpeers,it

hasn’thadmuchtoshow

forit lately.TheAcelity

takeoversignalsa new—

but risky—strategy by

3M tobuyitswaytobet-

tergrowth.

Acelity isn’t a bad

fit strategically. While

 LAST THING

With Bloomberg Opinion

By Brooke Sutherland

3M’s Biggest Deal

Won’t Be a Cure-All

15x

○ 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.

○ MEDICAL BILLS

The acquisition agreement values

Acelity at about 15 times its adjusted

2018 earnings before interest, taxes,

depreciation, and amortization.

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 com-

pany to sell instead.

More important, the transaction

feels like a distraction as 3M grapples with deteriora-

tion 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 spend-

ing 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.  —Sutherland is a deals columnist

for Bloomberg Opinion