Gustavo Ballvé on February 28th, 2011
Corporate Strategy, Food for thought, Healthcare, Home, Industries, Investment Themes, Mental models, Portfolio Management

When we say we try to find companies whose managers are good capital allocators, it’s easy to imagine managers that deploy capital well – that is, who invest shrewdly in existing and new businesses, and when the returns on those investment seem poor, return capital in the best possible way (whether dividends or share repurchases). Thermo Fisher’s management has been a case study in excellence in all these regards.

What isn’t perhaps intuitive is that capital allocation involves divestitures as well – and the latest from Thermo suggests that they also do a great job when it comes to selling assets.

The company is selling $940 million in assets (2 companies: Athena and Lancaster) and reinvesting all the proceeds in its own stock. Both assets are in diagnostic services (sold to Quest and Eurofins). Though not that relevant for the company (4.3% of the Mkt Cap), it’s interesting to note that the divisions were bought circa 2005 by Fisher (pre-TMO merger) and, including earnings yield and sale price, they generated at least a 20% IRR for Thermo, whose cost of debt is slightly above 3%.

Even so, given the relative irrelevance and historical preference for “plug-in” acquisitions, the question is “why do it”? We’ve discussed it with management and it seems just regular portfolio pruning. The acquisitions were completed by Fisher management prior to the merger and represent services-focused units that TMO doesn’t think should represent the core of their activities. While everything any source tells you should be taken with a grain of salt, even assuming that TMO let a good asset go (we just don’t know), at least it got well compensated for it.

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