Danaher Corporation Deep Dive

Welcome to the 69th Pari Passu newsletter.

A month ago, we learned more about one of the companies with the strongest brand in the world, Ferrari. Today, we are learning about Danaher Corporation, a company that goes vastly unnoticed in the United States. If you are wondering where the discrepancy in brand comes from between these two companies, the underlying product is the likely answer.

Ferrari makes luxury sports cars while Danaher is a globally diversified conglomerate that has made unsexy medical, industrial, and commercial products and services.

However, Danaher is considered by investors to be one of the greatest compounders of all time. If you bought Apple’s stock in 1984, you would have returned 165,636%. Meanwhile, if you had instead bought Danaher, you would have returned a whopping 192,208%. This article explores the growth of a quiet American titan.

Source: Danaher 2022 Investor Presentation

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Danaher’s Early Days

Steven and Mitchell Rales were born in 1951 and 1956, respectively, and they grew up two of four sons of Norman Rales, a large Washington developer of real estate. Steven graduated from DePaw University, were he also played football, before earning his law degree from American University. Meanwhile, Mitchell graduated with a business degree from Miami University in 1978. Both brothers worked for their father after graduation, where they learned the real estate investing business. Very quickly, the brothers decided to set out on their own. They formed a real estate investment partnership in 1979, called Equity Group holdings, later renamed Diversified Mortgage Investors [18, 19]. 

By 1984, several key trends were changing the corporate landscape. First, Japanese manufacturing had significantly innovated, and was beating U.S. industry in many areas. Process innovations that had developed in Toyota in the 1950s and 1960s and diffused to other Japanese companies had lowered production costs and boosted their exports. This was particularly evident in the domestic automotive industry, which saw Japanese manufacturers’ share grow from 9% to 22% between 1975 and 1982. As the U.S. found itself buying more things than it was selling to Japan, a trade deficit emerged, which alarmed many prominent U.S. businesspeople and politicians including President Ronald Reagan. One of their primary concerns was the long list of acquisitions of U.S. trophy assets Japanese were now undertaking with their excess capital, which included the Mobil Building in New York, the Firestone Tire and Rubber Company, and the Rockefeller Center. Most importantly, many people were worried that American manufacturing had lost its edge for good [20].

During this same period, there was a surge of Leveraged Buyouts, or LBOs, driven by the availability of high-yield, or “junk,” bonds. Frequently, these takeovers were hostile, meaning they did not have the support of the target company’s management team. Many of these LBOs targeted divisions or entire companies that private equity investors saw as inefficient, particularly in large scale consumer and manufacturing businesses with layers of middle management, middling operational performance, and excessive expenditures such as corporate jets. Notably, Drexel Burnham Lambert, under Michael Milken’s purview, issued the first billion-dollar junk bond offering for the takeover of Safeway Stores, Inc. in 1982.

It was against this backdrop that the Rakes brothers decided to rebrand their firm again in 1984, naming it Danaher, after a river in Montana where they fished. With their converted real estate investment trust, the brothers created an industrials-focused leveraged buyout vehicle, and they tacked assets on to their shell company through hostile bids, greenmail, and junk-bond financing with the support of Drexel Burnham Lambert and First Boston as their bankers. While they were never flamboyant, the brothers agreed to sit for photos and an interview with Forbes in 1985 to speak about their newfound success. The resulting article, headlined “Raiders in Short Pants,” called the Rales brothers “callow youths,” more like real estate speculators than industrialists,” and “cocky to the point of foolishness.” Since then, neither brother had spoken to the media, earning the Raleses a reputation for operating in the shadows. However, others had more respect for the brothers. John Doak, formerly a vice president at a firm acquired by the Raleses, noted that “Mitch and Steve have just an uncanny ability to see value in situations, and contrary to what other people think, they usually pay a very fair price for what they buy.” Meanwhile, other people close to the brothers have described them as shrewd, aggressive, tough, and closely bound by their family [2, 12].

Development of the Danaher Business System (DBS)

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