What Makes Danaher Corp. Such a Star?
Every once in a while a business journalist notices how well Danaher Corp. has performed during the past few decades, and feels compelled to remark upon it. Well, now I’ve noticed, and I guess the most appropriate remark is, “wow.” Or maybe “jeepers.”
There are a few companies with even more impressive long-run returns than this -- Berkshire Hathaway and Altria since the late 1960s; Microsoft and Oracle since their 1986 initial public offerings. But everybody knows about them (well, maybe Altria is a surprise). Danaher is in rarified territory, but it doesn’t get much attention.
What does the Washington-based company do? It makes essential-but-obscure stuff -- engine brakes for trucks, testing equipment for electronics, diagnostic instruments for doctors, braces for your teeth. The big name-brand exception used to be the Craftsman hand tools sold at Sears, but Danaher sold that business to Bain in 2012. Such dealmaking is core to the company’s identity -- it has made hundreds of acquisitions since the early 1980s and sold off a lot too. Last week, though, it seemed to take things to a new level. Danaher said that it will be splitting into a “science and technology growth company,” which will keep the Danaher name, and a “diversified industrial growth company,” which won’t. It also announced the $13.8 billion acquisition of Pall Corp., a maker of filtration and purification systems that will be part of the science-and-technology Danaher, and the beginning of an exchange offer in which Danaher spins off to shareholders its stake in NetScout Systems, with which it recently merged its communications-equipment business.
Call this new phase Danaher 4. Danaher 1 came into being after Steven and Mitchell Rales, brothers in their 20s who had been working in their father’s Washington-area real estate business, struck out on their own in 1979. As Businessweek told the story in 2007:
In the early 1980s they took a former real estate investment trust, turned it into a leveraged-buyout vehicle, and swashbuckled through the next few years, tacking assets on to their shell company through hostile bids, greenmail, and junk-bond financing, with Michael R. Milken's Drexel Burnham Lambert and First Boston as their bankers.
Forbes mocked the brothers in 1985 as “Raiders in Short Pants,” but they soldiered on. Along the way they picked up the name Danaher on a trout-fishing trip to Montana (it’s the name of a tributary of the Flathead River). Then, when the junk-bond market collapsed at the end of the decade, they and the chief executive officer they had hired from Black & Decker, George Sherman, tried a different approach.
One of the companies Danaher had bought, brake-maker Jacobs Vehicle Systems, had started experimenting in 1987 with a Toyota-style lean manufacturing system. It worked, and Sherman began rolling out what came to be called the Danaher Business System across all the company’s subsidiaries. This was Danaher 2. The key was and is the Japanese concept of kaizen -- continuous improvement. If your company is acquired by Danaher you can expect a days-long kaizen session where you try to figure out how to make what you make in less time in less space with less waste. After that the improvements are supposed to keep coming and coming. (If your reaction to that is, “Hey, I’d sure like to see a slide deck by an executive at a Danaher subsidiary that explains this process,” this is your lucky day.)
This approach freed up cash that let Danaher keep making acquisitions even when financial markets weren’t cooperating. It also quickly propelled Danaher into the ranks of major industrial companies (last year it was No. 149 on the Fortune 500), a scale at which it could no longer continue operating as a grab bag of industrial manufacturers. In the late 1990s it began organizing itself into what eventually became nine “platforms” that were run as something close to independent businesses, albeit with metrics closely monitored by headquarters. As I understand it from this Darden School of Business case study, the HQ staff consists basically of takeover specialists, bean counters and a few strategists.
This is Danaher 3, although it isn't like Danaher 1 or 2 ever went away -- the company remains a dealmaking machine, and the Danaher Business System still rules. The result is a culture that workers from acquired companies seem to either hate or love. It’s relentless and extremely numbers-oriented, but transparent and straightforward. Executives who can hack it tend to stick around. The current chief executive officer, Thomas Joyce, who took over last September, started as a marketing project manager in Danaher’s tools groups in 1989.
Danaher began as a hodge-podge of opportunistic acquisitions, yet it has come to have a coherent and extremely effective culture. Even if you think that culture sounds miserable, you have to grant that creating and embedding it amounts to a remarkable accomplishment for a company with Danaher’s roots. This is clearly the doing of the Rales brothers, who seem to have made a smooth and lucrative transition from corporate raiders to corporate statesmen. Steven owns 6.1 percent of the company and is chairman; Mitchell owns 6 percent and is chairman of the executive committee.
Not that you hear much about them. With their Danaher stakes and other investments, Steven ranks No. 296 (at $5.5 billion) and Mitchell No. 372 ($4.4) on the Bloomberg Billionaires list of the world’s richest people. But unless you count Steven’s appearance as the voice of the Beaver in Wes Anderson’s “Fantastic Mr. Fox” -- he’s a major backer of Anderson’s films -- they assiduously avoid the spotlight. They never talk to the media, and seem to discourage friends from talking about them to the media.
Danaher executives aren’t exactly publicity hounds either, but they do speak occasionally to journalists and regularly to sell-side analysts. In a call last week to discuss the Pall acquisition and the breakup of the company, CEO Joyce said the split was about giving each of the two parts of the company “a focused, coherent, straightforward structure that allows them then to focus on their end-markets and have a renewed license to do M&A.” That is, the science and technology Danaher will trade at a higher multiple that will enable stock acquisitions, while the industrial spinoff will have a lower multiple but lots of cash.
Another way to look at it is that Danaher is keeping the growth businesses for itself and getting rid of the duds. The Rales brothers will be staying on the boards of both, though. And by now I think it’s fair to say that they know what they’re doing.
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