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DSM’s M&A track record is quite impressive, and their ability to align their M&A activities with their business strategy even moreso. The development of DSM’s Biomedical business is likely to become a case study for many companies looking to develop and implement strategies to step into a new business area.

Practically all large businesses run a recurring annual corporate development process that sets strategies on how to grow core activities. But in difficult times, many seek to enter new markets that span beyond their core to spur additional growth. In reality, few succeed and many falter: the most common and destructive pitfall those endeavors face is the lack of management coherence and resolve: they wish to enter a new space, but are not willing to spend the money to do so, as they do not really understand the new space the way they understand their core. The conundrum leads to acquisitions of sub-par companies, if at all, that frequently fall short of overhyped goals.

What did DSM do so well over the past 12 years in Biomedical?

First, they branched out into a new market, but always kept a link to two of their core strengths: material science and pharmaceuticals.

Second, they were able to elegantly use every M&A structure in their toolbox. The business originally relied on organic R&D funding for the better part of six years. It then struck a public-private partnership with a consortium of Dutch industrial companies followed by the acquisition of PTG (Polymer Technology Group) in 2008. It followed with a joint-venture with Dupont in 2010, and most recently announced the acquisition of Kensey Nash. Covering the full scope of M&A deal structures is not an end in itself; it is just the illustration of how flexible and pragmatic DSM’s management is.

Third, DSM financed activities at a loss for a long period of time (I estimate 10 years). Having management resolve to stick to its guns for such a long period is exactly what is required to build new business platforms. Companies expecting returns from new business areas within less than five years are often set for a rude awakening.

Fourth, the M&A transactions involved in the build-up of DSM Biomedical are daring and underscore the bold appetite for risk from management. The high valuations, respectively at 2.5x and 3.5x sales for PTG and Kensey Nash show that these companies do not come cheap, but they go a long way to highlight that building a solid business requires a solid base.  And both PTG and Kensey Nash are effectively “hidden” champions in their respective niches, enabling DSM to plan for high growth in a credible way.

DSM stands to transform its business in the next 10 years by pushing consistent, well thought-out and well executed strategies in their two emerging businesses: Biomedical and Bio-based products. Both seem on a path to success, playing into some of the most transformational trends of our decade: bio-fuels, bio-based materials and regenerative medicine. In doing so, DSM is setting the standard as to how to successfully establish new businesses.