Danaher Corporation
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9-708-445 REV: APRIL 15, 2011 BHARAT ANAND DAVID J. COLLIS S O P H I E H O OD Danaher Corporation In early April 2010, Danaher Corporation’s Chief Executive Officer Larry Culp and his senior executive team were getting ready for another round of performance reviews of the firm’s diverse operating businesses. As usual at Danaher, this process was likely to involve not only conference room presentations but visits to the factory floor and conversations with customers. Culp had joined Washington D.C.-based Danaher after graduating from Harvard Business School in 1990, and was appointed CEO in 2001 at the age of 38. He had taken over a company that had generated compound annual stock returns of over 25% since its founding in 1985. Under Culp’s leadership so far, Danaher’s performance continued unabated. Between 2001 and 2006, Danaher’s revenues and net income more than doubled, the firm consummated over 50 acquisitions, and its stock price continued to outperform its peers by impressive margins1 (see Exhibit 1). And, while the “great recession” of 2008-09 impacted its businesses like any other industrial conglomerate, the company emerged relatively unscathed. Indeed, Culp was about to announce higher than expected earnings for yet another quarter. Culp was wary of the term “conglomerate,” instead referring to Danaher as a family of strategic growth platforms. Management defined a strategic growth platform as “a multi-billion-dollar market in which Danaher can generate $1 billion or more in revenue while being No. 1 or No. 2 in the market.”2 In 2010, Danaher’s portfolio comprised five such platforms, representing over 80% of its total revenue. In addition, the firm operated in seven focused niche businesses—a “business operating in a fragmented or small market in which Danaher has sufficient market share and acceptable margins and returns.”3 The company’s portfolio had evolved over the years. Once a cyclical industrial company, Danaher had in recent years become a scientific and technical instrumentation company that competed in less cyclical markets.4 This evolution was most apparent when considering the build-out of the Dental and Life Sciences & Diagnostics platforms.5 (The firm’s other platforms were Environmental, Test & Measurement, and Industrial Technologies, see Exhibit 2). Danaher boasted leading market positions in a number of their business areas (see Exhibit 3). Many of these companies were the result of successful acquisitions executed in the past dozen years. ________________________________________________________________________________________________________________ Professors Bharat Anand and David J. Collis and Research Associate Sophie Hood prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2008, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. 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 Harvard Business School. 708-445 Danaher Corporation Culp had earned widespread praise for being a “hands-on” CEO. Culp believed that “the role of the CEO is to ensure the company has a clear and well-articulated strategy coupled with the right people to execute that strategy.”6 For Danaher, a central pillar of that strategy was the Danaher Business System, or DBS (Exhibit 4 illustrates the system’s core tenets). As one analyst described, “the DBS process system is the soul of Danaher. The system guides planning, deployment and execution.”7 Culp affirmed the significance of the company’s philosophy of kaizen, or continuous improvement, in his first letter to shareholders in the 2001 annual report: “The bedrock of our company is the Danaher Business System (DBS). DBS tools give all of our operating executives the means with which to strive for world-class quality, delivery, and cost benchmarks and deliver superior customer satisfaction and profitable growth.” Danaher’s successful implementation of DBS across its acquisitions had resulted in rapid growth. Indeed, Danaher’s management team had an impressive track record of expanding the operating margins of acquired companies (see Exhibit 5). One equity research firm also noted that they “were pretty amazed at the number of new product introductions across the portfolio.”8 However, despite its tremendous success, Danaher still faced a number of challenges. First, as the company grew to over $13 billion in revenues with strong cash flow, could it continue to identify and execute attractive, value-added acquisitions, as well as drive organic growth within its current businesses? Second, what challenges might arise as it applied DBS to some of the higher technology, science-based industries that Danaher had expanded into in recent years? Last, some observers wondered how long “continuous improvement” could continue. During Culp’s 20-year tenure with Danaher, he had seen the company rise to numerous challenges before. He was quietly confident that the firm would do so again. Corporate History Origins Steven and Mitchell Rales were two of four brothers who grew up in Bethesda, Maryland. In 1980 they formed their initial investment vehicle, Equity Group Holdings, with an objective to acquire businesses with the following characteristics: (i) understandable operations in a reasonably defined niche, (ii) predictable earnings that generate cash profits, and (iii) experienced management with an entrepreneurial orientation. In 1981, they acquired Master Shield, Inc., a Texas-based vinyl siding manufacturer. Then, they acquired Mohawk Rubber Company of Hudson, Ohio, using $2 million of their own money, and borrowing $90 million. Soon after, a real estate investment trust (REIT) called DMG, Inc. came to the attention of several investor groups, including the Rales. DMG had not posted a profit since 1975, but it had more than $130 million in tax-loss carry forwards.9 In 1983, the brothers gained control of publicly traded DMG, and sold the company’s real estate holdings the following year. They then folded both Master Shield and Mohawk Rubber Company into the REIT, sheltering the manufacturing earnings under the tax credits.10 They also changed the company’s name to Danaher, after a favorite fly-fishing locale in western Montana. The Danaher River traced its name to the Celtic root “Dana,” or “swift flowing.”11 From then on, the brothers used the newly tailored Danaher as an acquisition vehicle. Using a considerable amount of debt, Danaher launched a series of both friendly and hostile takeovers. They focused on low-profile industrial firms, and purchased 12 additional companies within two years of Danaher’s debut. Early acquisitions included various manufacturers of tools, controls, precision 2 Danaher Corporation 708-445 components, and plastics. In such mergers, Danaher’s focus was on cutting costs and paying down debt through the divestiture of underperforming assets. By 1986, Danaher was listed as a Fortune 500 company with revenues of $456 million. The 14 subsidiaries were at that time organized into four business units: automotive/transportation, instrumentation, precision components, and extruded products. Despite their rate of growth, Danaher’s acquisition strategy was far from indiscriminate. As outlined in the 1986 annual report: “As we pursue our objective of becoming the most-innovative and lowest-cost manufacturer of the products we offer, we are seeking a market position with each product line that is either first, second or within a very distinctive market niche.”12 At least 12 of their 14 subsidiaries were market leaders. Danaher considered its strategy distinct among the numerous serial acquirers of the mid-1980s: “If there’s one thing that distinguishes us from the other players in the M&A field, it’s that we stay in touch with the companies,” commented Steven Rales in 1986. After all, he added, “we’re reasonably young fellows with long time horizons.”13 Continuous Improvement Around 1988, the Rales brothers shifted tack in three noteworthy areas. First, they turned an eye inward—both to the subsidiaries’ operations, and the operations of the overall corporate entity. The managers of Jacobs Vehicle Systems, one of Danaher’s divisions, had studied Toyota Motor Corp.’s lean manufacturing with great success. Before long, the brothers implemented the system companywide. The move bespoke what certain Danaher managers later described as their “near-instinctive affinity for lean manufacturing.”14 This penchant for lean manufacturing was the first aspect of a broader philosophy of kaizen—an approach that would ultimately become known as DBS, one of Danaher’s hallmarks. Second, the Rales brothers noticed early warning signs in the junk-bond market, prompting them to reduce their debt. As a result, they were able to successfully weather the recession of the early 1990s.15 Finally, Steven and Mitchell chose to retire their positions as chief executive and president. Although the brothers stayed on as chairman of the board and chairman of the executive committee, they looked to someone else to take the day-to-day helm. The Sherman Years In February 1990, Danaher appointed George M. Sherman as president and chief executive officer. Sherman was 48 at the time of his appointment, an engineer by training who also had an M.B.A. He joined Danaher from the Black & Decker Corporation, where he had been a corporate executive vice president and president of the Power Tools and Home Improvement Group. Sherman was known as a highly effective leader; one analyst commented that he was “the highest-energy CEO I’ve met. He is exhausting to be around.”16 At Black & Decker, he was widely credited with the turnaround of the Power Tools businesses, which grew twice as fast as the market during his tenure.