Danaher: A compounding machine over four decades

Steven and Mitchell Rales, the two brothers who co-founded Danaher, formed an investment partnership in 1979 when they were still in their 20s. After buying a bankrupt REIT in 1983, they merged all the assets they owned and formed a public company named “Danaher”, which is named after a Montana river where the brothers enjoyed a good fishing luck. The bankrupt REIT with its tax-loss carryforwards helped the company shelter profits from the acquired manufacturing businesses. It turns out Danaher wasn’t only generous to the Rales brothers with fishing luck; it also enriched the brothers with astounding worldly riches as well.

In 1988, Washington Post ran a piece titled “D.C.’s Rich, Unassuming Rales Brothers”: “This is a story about the swift, invisible rise of Steven and Mitchell Rales, two very young, very rich, very private brothers who are into plastics, tire changers, engine retarders, hand tools, industrial power chucks -- and debt and hostile takeovers…they oversee a sprawling conglomerate built on borrowed money and nurtured by a keen eye for mismanaged, unglamorous industrial companies.”

Rales brothers, who relinquished management roles in 1990 but continues to sit at the board to this day and owns ~11% of Danaher, only got richer over time thanks to Danaher’s more than 20% CAGR over four decades, but the texture of Danaher evolved so much that it has transformed itself from a collection of middling industrial businesses to owner of world-class life science, diagnostics, and environmental/applied solutions businesses! At the heart of this compounding machine lies “Danaher Business System” or DBS which sounds like the typical corporate jargon at first glance, but hard not to appreciate when you carefully peel through the system.

Here’s the outline for this month’s deep dive:

Section 1 Sketching the History of Danaher: From the book “Lessons from the Titans”, I summarized the story of Danaher’s meteoric rise from the days of Rales brothers to George Sherman, Larry Culp, Tom Joyce, and Rainer Blair.

Section 2 Danaher Business System: I discussed DBS, which is perhaps the source of Danaher’s persistent outperformance for over four decades, in this section.

Section 3 Danaher’s Business Segments: Danaher owns approximately 25 independent businesses which they report in three segments: life sciences, diagnostics, and environmental and applied solutions. These three segments are discussed in this section.

Section 4 Capital allocation and incentives: I elaborated on Danaher’s capital allocation and management incentives in this segment.

Section 5 Valuation and model assumptions: Model/implied expectations are discussed here.

Section 6 Final Words: Concluding remarks on Danaher, and disclosure of my overall portfolio.