Mad Money

Cramer’s next potential break-up play… say what?

Potential break up play: Danaher (DHR)

(Click for video linked to a searchable transcript of this Mad Money segment)

Jim Cramer believes one of the most effective ways a company can unlock value is to break-up.

Therefore, he scours the market looking for good companies that could become even better if they separated into two or more independently traded business units.

And after considerable research, Cramer's next break play is -- Danaher.

The "Mad Money" host knows that you may have just fallen off your chair.

After all, the conglomerate has generated huge value by employing a strategy that's exactly the opposite of breaking-up. For the past 25 years Danaher has been getting bigger through strategic acquisitions.

"They've made something like 400 acquisitions since 1984," Cramer said, "and along the way shares have rallied 7,587%. If you bought just one-hundred shares of Danaher twenty-five years ago for $1,700, you'd now have an investment that's worth nearly $129,000."

Considering the gains made from bulking up, why on earth would Cramer think Danaher should break-up?

Oli Kellett | Taxi | Getty Images

Largely, Cramer thinks the market environment has changed and Danaher's ability to grow through strategic acquisitions isn't nearly as viable as it once was.

" had always been a disciplined deal-maker; they don't like to pay up for their acquisitions. But we're now in an environment where there's so much private equity money floating around, it's become almost impossible for this company to make the kind of smart purchases they were known for. Lately, every time Danaher looks interested in acquiring a company, they get into a bidding war with the private equity guys, and Danaher loses these bidding wars because they're not willing to pay up."

Although Cramer's insights are purely his own, he doesn't think he's the only one who's recognizes the shift. He thinks Danaher knows it too.

"At the end of last March the company made a host of senior leadership changes, that I think can easily be interpreted as a move to put key executives in future CEO positions."

"Then, last month the company's long-time CEO, Larry Culp, announced that he'd be retiring effective next March. With Culp leaving, this would be a pretty natural moment for the company to consider a break-up," Cramer said.

And Cramer added that because Danaher often describes itself as eight smaller businesses contained in one big conglomerate, a break-up isn't far-fetched. In fact, he says it would be relatively easy to implement.

"First, I think Danaher's water business is big enough to be a standalone company. Second, Danaher could create a terrific Industrial Technologies company by grouping together its Motion, Product ID, and Gilbarco divisions. Third, I'd combine Danaher's Life Sciences and diagnostics division with its Dental supplies and equipment business to make a single company. And fourth, I think Danaher's Test & Measurement segment, which makes test and measurement products."

Cramer's crunched the numbers and he says if the 4 business units outlined above did break into individual companies, and if they were awarded an average valuation relative to peers in their respective industries, then Danaher should be a $90 stock, right now.

However, he added "Wall Street is usually willing to pay a premium for companies that are run by former Danaher executives. That's how good these guys are." Therefore he thinks the sum of the parts could be around $100. "That's 27% higher than where the stock is right now."

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Again, the strategy is purely speculative on Cramer's part. The "Mad Money" host is simply sharing an idea, nothing more. However, if he's right, he says, "The upside could be enormous." And if he's wrong and you buy the stock, you'll be holding shares of an extremely well-run company that's generated big returns over the long-run.

Call Cramer: 1-800-743-CNBC

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