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Danaher—The Making of a Conglomerate UVA-BP-0549 Rev. Dec. 9, 2013 DANAHER—THE MAKING OF A CONGLOMERATE After joining Danaher Corporation (Danaher) in 1990, CEO H. Lawrence Culp helped transform the company from an $845 million industrial goods manufacturer to a $12.6 billion global conglomerate. Danaher’s 25-year history of acquisition-driven expansion had produced healthy stock prices as well as above average growth and profitability for more than 20 years (Exhibits 1 and 2); however, Wall Street had questioned the scalability of the company’s corporate strategy and its reliance on acquisitions since mid-2007. Prudential Equity Group had downgraded Danaher to underweight status, citing concerns over its inadequate organic growth. Company History (1984–91) In 1984, Steven and Mitchell Rales had formed Danaher by investing in undervalued manufacturing companies. The Rales brothers built Danaher by targeting family-owned or privately held companies with established brands, proprietary technology, high market share, and room for improvement in operating performance. Averaging 12 acquisitions per year (Exhibit 3), by 1986, Danaher was listed as a Fortune 500 company and held approximately 600 small and midsize companies. Acquisitions were concentrated in four areas: precision components (Craftsman hand tools), automotive and transportation (mechanics’ tools, tire changers), instrumentation (retail petrol pumps), and extruded products (vinyl siding). As these businesses grew and gained critical mass, Danaher used the term business unit to define any collection of similar businesses. Exhibit 4 provides a brief history of each of the original four businesses. Restructuring George Sherman was brought from Black & Decker as Danaher’s CEO following the crash of the LBO market in 1988. Sherman decided to fund acquisitions through cash from operations rather than debt. To generate the extra cash, Sherman encouraged a variety of experiments, DOone of which wasNOT the successful adoption COPY of Toyota’s Lean manufacturing This case was prepared by Sriram Nadathur (MBA ’09) and Professor L. J. Bourgeois III. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2010 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. -2- UVA-BP-0549 techniques, which Danaher subsequently applied across all holdings. Sherman also instituted company-wide incentives to encourage managers at all levels to focus on cash. The combination of Lean manufacturing and cash management policies were organized as the Danaher Business System (DBS). By improving all of its processes, Danaher became a cash-generating machine able to buy more companies. From Business Units to Strategic Platforms (1992–2009) By the mid-1990s, Danaher’s size and diversity exceeded its headquarters’ bandwidth, so Danaher reorganized into four “market segments” and nine “strategic business platforms.” Exhibit 5 shows Danaher’s market segments, strategic business platforms, and niche lines in 2009. From then on, Danaher acquired a business only if it served one of two purposes: (1) as a platform-establishing transaction, where the target laid the foundation for Danaher to enter a new industry; or (2) as a bolt-on transaction, where the target strengthened a preexisting line of Danaher businesses. Platform-establishing transactions were used to enter high-growth markets where Danaher could gain competitive advantage through operational excellence. Within each platform, Danaher used bolt-on transactions to make existing businesses more competitive, either by expanding products or increasing market coverage. In cases where adjacent acquisition opportunities were not available, Danaher also maintained highly profitable “focused niche” business lines. By the late 1990s, headquarters no longer was the sole initiator of deals as platforms and business units also began to identify targets. Danaher’s nine platforms were grouped into four segments: industrial technology; professional instrumentation; tools and components; and medical technologies (Exhibit 5). Exhibit 6 provides segment-by-segment financials. The following sections describe the evolution of the four segments and nine platforms. Industrial Technologies Segment Motion-control platform BeforeDO platforms were NOTestablished, in 1994 Danaher COPY acquired Germany-based Hengstler GmbH, a maker of counters and encoders. It then made acquisitions in instruments, switches, controls, and test equipment for the telecommunications industry. Danaher separated its motion-control business into a platform in 1998 with the acquisition of Pacific Scientific for $420 million. In 2000, a series of bolt-on acquisitions added robotics, wheelchairs, lift trucks, electric vehicles, and industrial motors. -3- UVA-BP-0549 Product-identification platform The product-identification platform, started in 2002, designed, manufactured, and sold commercial printing equipment to the packaging industry. Typical customers were food and beverage companies, pharmaceutical firms, retailers, package and parcel delivery companies, and commercial printers. Focused niches By 2009, the industrial technologies segment also contained two focused niche businesses: aerospace and defense, and sensors and controls for manufacturing. The industrial technologies segment contributed 26% of Danaher’s revenues in 2008, with 51% derived from outside the United States.1 Professional Instrument Segment The professional instrument segment contained two strategic platforms: environmental and test and measurement. The segment contributed 38% of Danaher’s revenues in 2008, with 57% generated internationally. Environmental platform The environmental platform focused on water-quality customers and petroleum retailers. Danaher entered the water-quality arena in 1996 through the platform-establishing acquisition of American Sigma. Forecasting a growing need for pure water for potable and industrial applications, subsequent acquisitions manufactured a variety of instruments to analyze, disinfect, and purify water. Customers included municipal drinking suppliers, wastewater treatment plants, and third-party testing laboratories.2 Danaher already had a strong presence in the retail petroleum market with the Veeder- Root acquisition in 1989 (Exhibit 3). With acquisitions in 2001 and 2002, Danaher built a dominant position in the manufacturing and sale of fuel-dispensing technology. Its products included leak detection, vapor recovery, retail automation, point-of-sale systems, and remote monitoring services. Market penetration was so high that it was hard for anyone to fill a petrol fuel tank without using a Danaher product. DO NOT COPY Electronic test and measurement platform The $625 million acquisition of Fluke Manufacturing in 1988, with its digital multimeters and electronic test equipment, established a new platform. Danaher recognized Fluke’s 1 Danaher Corporation 10-K filing, 2008, 48. 2 Danaher Corporation 10-K filing, 2009, 5. -4- UVA-BP-0549 exceptional business development and integration teams and quickly added 20 additional acquisitions. Culp’s goal with Fluke was to boost its single-digit margin through cost-cutting, innovation, and quality. Fluke became proficient at developing new products, executing product refreshes, and delivering new applications with existing instruments. In addition, Culp redirected Fluke’s R&D through the acquisition of companies with nascent technologies and developing new applications for them. By rationalizing product lines, speeding up inventory turns, and reducing floor space, Fluke’s margins more than doubled. In 2007, Danaher acquired Tektronix for $2.8 billion, doubling the size of the electronic test and measurement platform. Tektronix made oscilloscopes and logic analyzers for measuring the performance of electronic equipment used in semiconductor and electronics manufacturing. Danaher improved profitability by downsizing, selling a subsidiary, cutting R&D, and scaling. Tektronix headquarters in Beaverton, Oregon was converted into a lean and disciplined operation with a strong bottom-line focus. For employees who had enjoyed Tektronix’s unique culture of individual freedom, trust, and reliance on independent judgment, Danaher’s new management philosophy came as a harsh change. By 2008, the test and measurement platform was Danaher’s largest with four primary businesses: Fluke, Fluke Networks, Tektronix Instruments, and Tektronix Communications.3 Tools and Components Segment Mechanics’ hand tools platform Tools and Components was Danaher’s core business. The acquisition of Armstrong Brothers Tool Company and Delta Consolidated Industries in 1994 moved the company into professional-grade tools, industrial tools, and tool storage equipment. With no significant subsequent acquisitions, the hand tools platform shifted its emphasis to making existing businesses more competitive. While mechanics’ hand tools made up the single platform in the Tools and Components segment, it also held four focused niche businesses: Delta Consolidated Industries, Hennessy Industries, Jacobs Chuck Manufacturing Company, and Jacobs Vehicle Systems.
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