[DHR] Danaher

Related post (read this first): [TMO] Thermo Fisher

The life sciences behemoth we now know as Danaher was birthed in 1980 as Equity Group Holdings, an investment vehicle through which brothers Steven and Mitchell Rales acquired struggling industrial businesses. The earliest acquisitions included Master Shield (vinyl siding and rubber products) and Mohawk Rubber (tires for cars and light trucks). Both companies were merged into a REIT whose real estate assets were divested, leaving behind NOLs to shelter the industrial earnings. Around this time, the Rales changed the name of their acquisition vehicle to Danaher, after a tributary of the South Fork Flathead River in Montana that, per company lore, served as “the setting for the fishing trip where Steven and Mitchell Rales envisioned a new kind of manufacturing company—one dedicated to continuous improvement and customer satisfaction“. The corporate website explains “The root ‘Dana’ is an ancient Celtic word meaning ‘swift flowing,’ an apt descriptor for the nimble mindset and rapid flow of innovation that have defined Danaher for decades.” Inspired by the Toyota Production System, the company began applying a program of lean manufacturing practices, the Danaher Business System, to rehabilitate market leaders in industrial niches who were operating below their potential.

For most of the 90s, with former Black & Decker executive George Sherman taking over as CEO and the Rales brothers remaining on the Board, Danaher expanded into power tools (they were the principal manufacturer for Sears, Roebuck’s Craftsman line), which were sold to auto repair shops, industrial distributors like Wesco, and retailers like Lowes. Along the way, they divested the cyclical, price-sensitive tires and auto components businesses.¹

Through their $625mn acquisition of Fluke in 1998, Danaher laid the foundation for its new Test & Measurement division, which sold to engineers sensors that could detect leaks in underground fuel storage tanks and devices that could gauge pressure, flow, and temperature. Fluke would then serve as a “platform” to absorb smaller, related companies, a maneuver that would be replicated in future acquisitions. By the time Sherman retired in 2001, a company that had derived close to 90% of its revenue from rubber goods in 1985 and 80% of its revenue from tools and auto equipment in 1991, would realize more than half its revenue from precision mechanical components, and instruments and consumables used to measure analog phenomena, treat wastewater (Water Quality), and print bar codes and product information on consumer goods packaging (Product ID)².

COO Lawrence Culp took the reigns from Sherman and formalized the pools in which Danaher would fish for acquisitions: $1bn+ product-centric markets with limited volatility and lots of fragmentation, growing mid/high single digits. Large platform targets were expected to hit 10% after-tax ROICs within 5 years, bolt-ons were expected to do so within 3. Under his leadership, in 2004-2005 the company crept into Life Sciences with acquisitions of Radiometer ($730mn, instruments measuring blood gases like carbon dioxide and oxygen) and Leica Microsystems (optical microscopes), as well as Dental, with purchases of KaVo ($425mn, dental equipment) and Gendex ($103mn, dental imaging). In 2007, Danaher also doubled down on the Test & Measurement exposure first established through Fluke, purchasing Tektronix, which sold test and measurement instruments to semiconductor and electronics manufacturers, for $2.8bn in its largest acquisition to date.

The next 2 years were tough. While Danaher had rid itself of the most commodified cyclical assets from the ‘80s, much of its revenue was still tied to economically sensitive businesses in the midst of a brutal recession. The company was forced to cut jobs, close plants, and lower guidance. But the downturn was marked by a silver lining. Through a series of related transactions, in 2010 Danaher spent $1.1bn on two businesses, AB SCIEX (mass spectrometry) and Molecular Devices (analytical instruments) that further bolstered its position in Life Sciences.

Coming out of the recession, Danaher continued to veer further away from its industrial origins, divesting their aerospace and defense assets and in 2010 placing their power and electric tools business into a 50/50 JV with Cooper Industries, which they sold to Bain Capital for $1.6bn three years later. In July 2015, under new CEO Thomas Joyce, they sold the cable network testing assets, picked up through their acquisitions of Fluke and Tektronix, to NetScout Systems for $2.6bn. Danaher was still doing bolt-ons in Product Identification and Test & Measurement, but the big dollars ($1bn+) were reserved for targets in acyclical markets like Life sciences, Diagnostics, and Dental. To wit, in February 2011 Danaher announced the $6.8bn acquisition of diagnostics giant Beckman Coulter³, which at the time was struggling with flat revenue growth (while the overall market expanded 4%-5%), weighed down by an inefficient cost structure – despite getting 80% of its revenue from recurring sources, mostly high margin consumables, BEC was only managing 45% gross and 12% EBITA margins compared to 50% and 18% for Danaher, who had a lower recurring mix – and wrestling with product recalls, not to mention facing heat from the FDA for failing to obtain proper clearances on modifications to its troponin test kits.

The transaction more than doubled the size of Life Sciences & Diagnostics, making this the largest of Danaher’s platforms, accounting for ~1/3 its total revenue.

BC was soon followed by the $2.1bn acquisition of Nobel Biocare, a Swiss manufacturer of dental implants. There were other big targets that Danaher was rumored to be bidding on but that ultimately went to other suitors, like Life Technologies, acquired by Thermo Fisher for $15bn, and Johnson & Johnson’s Ortho-Clinical diagnostics business, acquired by Carlyle for $4bn.

In 2015, the company simultaneously announced that it would be acquiring Pall Corp., a supplier of filtration and separation technology, for a whopping $13.8bn, and spinning off $6bn of certain industrial-ish revenue as an independent entity called Fortive. This is often framed as the first formal division between Danaher’s industrial and non-industrial segments, but considering that nearly half of Pall’s revenue came form Industrial applications and that Danaher kept Water Quality and Product ID, the split was arguably as much about concentrating exposure to businesses that shared a sticky razor/razorblade model with a high consumables mix. Following the spin, about 60% of Danaher’s revenue would come from after-market sales.