New: Diploma joins FTSE 100 and Danaher to acquire Abcam – latest from the Quality Shares Portfolio

Two of the 15 companies currently in the Quality Shares Portfolio have made the news this week. 

Yesterday, 30 August, it was confirmed industrial components supplier Diploma is joining the FTSE 100. 

Earlier this week, another company in the Quality Shares Portfolio, life sciences firm Danaher, made the headlines with its announced $5.7 billion acquisition of Cambridge-based biotech Abcam. 

I view these as encouraging signs for the Quality Shares Portfolio. 

Diploma graduates to the FTSE 100

Diploma is a great example of the type of company I look for – operating below the radar of many investors, and rarely making headlines. 

The company has performed strongly since the launch of the Quality Shares Portfolio, reporting a 21% increase in revenues, including organic growth of 9%, in the nine months to June 2023.

This performance has been driven by several astute acquisitions, further entrenching Diploma’s niche market positions and providing entry to new fast-growing segments, like industrial automation. 

It is nice to see this progress being reflected in the share price performance, leading to its entry into the FTSE 100, although past performance isn’t a guide to the future. Diploma still has a relatively small share of its markets and a brimming acquisition pipeline. So, I believe there could still be more to come. 

Danaher – agreement to acquire Abcam

Another company that made the headlines was Danaher. The company has agreed to pay c. $5.7 billion for Abcam, a leading provider of antibodies for scientific research, drug discovery and diagnostics, headquartered in Cambridge. The deal is expected to close next year, subject to regulatory and shareholder approvals.

I’ve followed Abcam for many years (it was previously on AIM, before listing on NASDAQ). I believe it has a great business model with high levels of recurring revenue and a trusted reputation amongst its customer base. Its antibodies are used extensively for scientific research, and I believe its long-term growth prospects are compelling. 

However, in recent years, Abcam’s performance has been disappointing. I think the main reasons for this are to do with its culture.

Abcam’s operational execution has left a lot to be desired. Missteps include a botched upgrade of an Enterprise Resource Planning (ERP) system, spiralling costs, expensive acquisitions and a loss of focus, leading to declining profit margins and falling returns on capital. 

Abcam’s founder, Jonathan Milner, recognises these issues. He is no longer involved in running the business but remains a major shareholder. Recently, he publicly criticised Abcam’s management and Board. This culminated in Abcam putting itself up for sale.

I suspect Danaher is well aware of these issues and sees scope to improve Abcam’s culture and operational execution. But clearly, this isn’t guaranteed. Changing the culture of a business is never straightforward and Danaher must tread carefully. 

That said, Danaher has a good track record of improving acquired businesses. This is largely due to a unique way of doing business called the Danaher Business System (DBS) which aims to improve operational processes and capture efficiencies in areas like supply chain, procurement, sales and back-end operations.  

The valuation Danaher is paying for Abcam (32x estimated 2024 EBITDA) strikes me as rather rich. But, if the DBS can be successfully applied, Danaher should be able to get Abcam’s profit margins moving in the right direction. When added to cost savings from the combination (which Danaher estimates at $75m annually by year five), it could lead to a significant acceleration in Abcam’s profits and justify the valuation multiple but there are no guarantees.