UVA-BP-0549 Rev. Dec. 9, 2013 PY DANAHER—THE MAKING OF A CONGLOMERATE CO 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) NO T 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. DO 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 crash of the LBO market in operations rather than debt. experiments, one of which brought from Black & Decker as Danaher’s CEO following the 1988. Sherman decided to fund acquisitions through cash from To generate the extra cash, Sherman encouraged a variety of was the successful adoption 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. PY 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) CO 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. NO T 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. DO The following sections describe the evolution of the four segments and nine platforms. Industrial Technologies Segment Motion-control platform Before platforms were established, in 1994 Danaher 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 PY 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 CO 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 NO Environmental platform T 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. DO 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 VeederRoot 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. 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 2 Danaher Corporation 10-K filing, 2008, 48. Danaher Corporation 10-K filing, 2009, 5. -4- UVA-BP-0549 exceptional business development and integration teams and quickly added 20 additional acquisitions. PY 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. CO 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. NO T 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 DO 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. Danaher became the world’s largest producer of do-it-yourself hand tools and specialized auto-service equipment, and all were category leaders. The tools portfolio declined 6% through 2008 at $1.2 billion in revenue while contributing 10% of total Danaher revenue, mostly in the United States. 3 Danaher Corporation 10-K filing, 2009, 6. -5- UVA-BP-0549 Medical Technology Segment PY Medical Technology, the newest segment, was Danaher’s response to saturation and low growth rates in its traditional platforms. By 2009, it had four platforms: dental, acute care, pathology, and life sciences. Dental technology platform CO In 2004, Danaher acquired a number of European dental companies and became the second-largest dental products company in the world. It led in a number of markets, such as orthodontic alignment brackets (braces), dental instruments, digital imaging, and restorative materials. Because dental companies made custom products for individual patients, they produced a lot of scrap. Danaher saw this as an opportunity for its factory-level kaizen method to remove the scrap and improve fulfillment lead times. Danaher was not accustomed to the more technologically-advanced dental companies, so it used its entry into dental technology as a learning opportunity to expand DBS capabilities to include R&D and innovation management. Acute care platform NO T Danaher established its acute care business in 2004 when it bought Denmark’s Radiometer for $750 million. Radiometer produced blood-gas diagnostic instruments4 used in hospital emergency rooms and was supplemented with two other acquisitions. Pathology diagnostics platform The pathology diagnostics platform came into being with the acquisition of Leica Microsystems in 2005, and, with subsequent acquisitions, established Danaher as a leading global supplier of microscopes used by medical and research professionals.5 DO Life sciences instrumentation platform The acquisition of Leica led Danaher into the adjacent area of life-sciences instrumentation. The addition of Vision Systems for $525 million in 2006 expanded Danaher’s product offerings to automated specimen-preparation instruments for diagnostic/lab service companies. The medical-technologies segment represented 26% of Danaher’s 2008 revenues, 64% of which was derived from international markets. 4 5 These instruments measured the concentration of oxygen and carbon dioxide in the arterial blood. Danaher Corporation 10-K filing, 2009, 7. -6- UVA-BP-0549 Organization PY Danaher’s organization was flexible enough to allow integration of large and small acquisitions, both at the corporate and business unit level (Exhibits 7 and 8). While strategic platforms became the basic building blocks, Danaher also had a mix of centralized functions, headquartered in Washington, DC, and decentralized functions shared within each platform. Corporate teams CO A small headquarters (HQ) team of approximately 50 included deal-making specialists and finance and legal staff. The corporate office controlled Danaher’s corporate strategy, deciding which companies to acquire and in which industries to invest. Corporate finance was linked to the finance organization of each platform and these, in turn, were linked to the finance teams for each business. The CFO also led a small corporate development team. Corporate development worked with the general counsel and the legal team to identify and execute M&A deals in addition to supporting, approving, or disapproving deals proposed by the finance and business-development teams at the platform level. Corporate development also made the first official offer to any approved target. NO T Human resources and leadership development at HQ facilitated identification, staffing, training, and progression of executives across the entire company. After an acquisition, corporate HR installed executives at various positions within a target’s business. They ranged from division presidents, to newly hired MBAs with specific mandates, to line managers, plant managers, business development managers, and marketing managers. Because Danaher preferred to promote from within, freshly hired MBAs and internal candidates identified for leadership tracks were carefully developed, increasing the pool of Danaher-trained leaders available to work on future acquisitions. Each business unit had its own HR team. DO There were two DBS-related functions at HQ: VP of training and VP of DBS. The VP of training oversaw the training of new hires as well as personnel of acquired companies. All employees, from intern to executive, were immersed in DBS for one to two weeks at the DBS training center in Chicago before beginning their assignments. The VP of DBS was responsible for improving the scope and applicability of management tools and systems within Danaher. This team advised platforms, individual businesses, and the transition teams of new acquisitions. While it was common practice in large organizations to use dedicated teams for Six Sigma initiatives, Danaher expected every employee to internalize and work with DBS tools every day. Emphasis was placed on a Lean mentality, which influenced the way employees interacted, thought, and communicated within and across Danaher companies. Corporate teams did not engage in running subsidiary companies; however, in order for the DBS system to work efficiently, corporate teams had access to the operating metrics of each platform and each subsidiary within the platform. -7- UVA-BP-0549 Strategic business platforms PY Platforms were self-sustaining entities within Danaher and formed the basic building blocks of the company (Exhibit 8). Strategic platforms were headed by executive vice presidents, referred to as the group executives (GEs), between whom there was very little formal interaction. Each platform was further organized into business lines. For example, the EVP and GE of the dental platform oversaw its three business lines: dental consumables, dental hardware, and laboratory equipment. Each business line had a “headquarters business,” typically the original platform-establishing business within that line. CO Each headquarters business had its own business-development team, finance organization, legal team, and other support functions. These resources empowered the business senior VPs and presidents to propose acquisitions within their industries as well as make operating decisions about their own subsidiaries. The business-development teams were staffed with individuals experienced in acquisitions and finance as well as relatively inexperienced or new MBAs. The subsidiary companies were tied to one of the headquarters businesses through a president who had profit and loss responsibility for that subsidiary. NO T A cross-functional integration team was formed within a platform whenever an acquisition closed. Consisting of a mix of line managers, DBS experts, and finance and marketing executives, it focused on transitioning the acquired company to the Danaher modus operandi within a defined period, usually 12 months.6 The integration team had clear goals based on DBS principles and was empowered to make operational, people, and product decisions. Danaher acquired 11 companies in 2006 for $2.7 billion, 12 in 2007 for $3.6 billion, and 17 in 2008 for $423 million.7 DBS and Operating Philosophy DO DBS was the means by which dissimilar companies were assimilated, managed, and evaluated. Starting as a factory-level Lean manufacturing system, DBS evolved into a comprehensive management system that demanded rigorous, detail-oriented, and measurable progress and accountability at every level, from the strategic decisions made at headquarters to the day-to-day operating decisions made at the subsidiary level. The continuous-improvement philosophy was applied across functions, from manufacturing to sales to product management to human resources. The tools and training developed within the DBS rubric were versatile enough to be deployed quickly at any newly acquired entity in any new industry. DBS provided the tools to measure and guide key goals and activities relative to customer goals concerning cost, quality, delivery, and innovation. At the operating level, foremen and supervisors used DBS to track and measure the achievement of these goals at monthly, weekly, 6 7 Danaher Corporation 10-K filing, 2009, 79. Danaher Corporation 10-K filing, 2009, 72–73. -8- UVA-BP-0549 PY daily, and, in some cases, hourly intervals. In a culture where everyone was held accountable for results, DBS encouraged employees to take immediate action to resolve problems and to call on any resource, without regard to bureaucratic and hierarchical considerations. Daniel Even, president of Sybron Dental Specialties, provided an illustration of how DBS helped transform his company in Exhibit 9. Acquisition Process Deal sourcing and due diligence CO Danaher built a demanding and hard-charging culture that emphasized results and the unequivocal adoption of DBS. Exhibit 10 shows Danaher corporate values. While setting stringent targets from the top, headquarters delegated responsibility, decentralized operations, and drove accountability to multiple levels of the organization. Alignment was assured on three levels: The goals of the subsidiary were tied to platform and corporate goals; leadership teams were well trained in core DBS philosophy; and executives with operating experience in other Danaher businesses were put in leadership positions in new acquisitions. NO T Acquisition ideas came from both platforms and headquarters. Typically, large acquisitions such as Tektronix and platform-establishing acquisitions were initiated by HQ, while bolt-on transactions were usually initiated by the business unit. In the latter case, the platform or business unit would draft an initial proposal to HQ with a rough evaluation of potential synergies. If the corporate development team approved the proposal, a five-member M&A team with members from both the corporate and business unit M&A groups would make the first offer to the target. If the offer was accepted, the deal moved to the due diligence phase. DO Due diligence was performed by the business unit M&A team with input from proposing managers. If sufficient synergistic opportunities were identified, the deal moved to valuation. Following analysis and recommendations from business units, the corporate team decided on the price. Corporate M&A had veto power over whether a proposal was pursued and could end the process for a number of reasons such as lack of sufficient synergies or insufficient bandwidth and resources to conduct due diligence. At times, businesses competed for time and attention from the corporate development team, which occasionally created tension. Criteria for acquisitions Danaher made acquisitions based on both strategic and financial criteria (Exhibit 11), screening companies for overall strategic fit, the likelihood that its DBS culture could be successfully deployed, stable earnings, differentiated brands or technologies, and strong market share of either bolt-on or platform-establishing transactions. Although bolt-on transactions were expected to reach ROIC thresholds within three years, platform-establishing transactions were allowed up to five years because of Danaher’s inexperience in new markets. It was not unusual -9- UVA-BP-0549 for Danaher to bid against companies such as Honeywell, Cooper Industries, or GE, but, if competitive bidding drove prices above Danaher’s limit, it would walk away. PY Postmerger Integration CO After a deal was valued, a business-unit integration team would take over from the fivemember business development team. The postmerger integration team was a mix of business managers, DBS experts, up-and-coming-talent, and finance and marketing executives charged with all decision making as well as execution of plans regarding the target. The team leader was usually the individual most qualified and experienced in such integrations but not necessarily the most senior. The integration team’s plans typically operated on multiple levels and across multiple functions, including staff, product lines, manufacturing, and finance. Executive staff NO T Decisions about who stayed and who was let go were made on a case-by-case basis, and terminations and retentions were announced on the day the deal closed. If Danaher was uncertain about its ability to successfully train a target’s leadership team in its operating principles, top and middle management positions were filled by existing Danaher employees. The acquired company’s desirable executives were offered new or related positions and encouraged to stay. Professional development and performance management plans were realigned with the Danaher system, and incentive structures were linked to the achievement of newly devised business priorities. Nonexecutive staff DO The integration team moved in on the day of closing to brief new employees; typically, it was the first time most heard about the purchase. Although input from the target might be used, personnel decisions were usually made by the integration team. The process was either smooth or rough depending on the goals of the seller (whether or not the CEO/owners wanted to retire and cash out), Danaher’s goals, and the strength of the relationship between the integration team and the subsidiary leaders. For nonexecutive staff, action was frequently drastic because support functions were generally terminated. Engineers stayed, if a plant or site was retained, or given the option to move if the product lines were integrated into a different business unit. Training To simplify postmerger work and allow Danaher to integrate the target company without disrupting operations, the target’s senior and middle management spent time early on (sometimes pre-merger) at the Chicago training center covering everything from kaizen events to policy deployment, value-stream mapping, performance management, and ideas-to-innovation (Danaher’s new organic growth initiative). DBS training would begin almost immediately for -10- UVA-BP-0549 retained employees. For employees at newly acquired companies, the experience was sometimes unforgiving (Exhibit 12). PY The DBS training model ensured that every new line manager was assigned to kaizen events across the family of businesses to drive hands-on improvements, and, in the process, learned Danaher’s culture, tools, and mindset. Each kaizen event was staffed with employees, leaders of the subsidiary, and new MBAs. The team focused on identifying a customer issue and fixing it in less than a week. It was not uncommon to see Larry Culp moving equipment around the factory floor in the middle of a kaizen event. CO Product lines and brands Manufacturing T The subsidiary brands were usually tied to one of the headquarters’ businesses. Danaher always left the target brand intact, but a complete integration into the Danaher culture was a must. If the acquisition filled a gap in the product portfolio, Danaher adopted a fold-in strategy, assimilating product lines into its own operation while shedding the support infrastructure. Danaher frequently rationalized products and, sometimes retained only some product lines while jettisoning the rest of a company. NO Before a deal closed, Danaher executives toured plants and searched for ways to improve performance, and after closing, drove these improvements through kaizen events. Crossfunctional teams, including managers and shift workers, coordinated reorganizing the factory and establishing new production and tracking methods. Even the smallest operation was scrutinized, be it the act of picking up a tool, the organization of parts, or the distance a worker moved to get the product to the next stage of production. Cellular manufacturing techniques were a common feature within Danaher plants, whereby managers and workers together determined the most efficient way to perform every operation and eliminate waste. DO Finance and controls Within 60 days of closing, Danaher’s own financial, personnel, and cost-accounting systems were installed in the subsidiary, enabling the integration team to measure and track synergies and carefully manage cash. Danaher set up reserves to cover anticipated closing costs and rationalization opportunities, and, as a result, operating executives could focus on top-line growth without worrying about profit and loss during integration. The Path Forward In March 2009, Culp wondered how to keep growing in the face of global economic crises, new low-cost competitors, raw material price increases, and criticism from market analysists. -11- UVA-BP-0549 Exhibit 1 DANAHER—THE MAKING OF A CONGLOMERATE T CO PY Danaher (NYSE: DHR) Stock Price Performance (Adjusted for Splits), 2000–2008 DO NO Data sources: Danaher 10-K filing, 2008, and shareholder meeting prospectus. -12- UVA-BP-0549 Exhibit 2 DANAHER—THE MAKING OF A CONGLOMERATE Sales Net Income 2008 12,697.46 1,317.63 2007 11,025.92 1,214.00 2006 9,466.06 2005 7,871.50 2004 6,889.30 2003 5,293.88 2002 4,577.23 2001 3,782.44 2000 1999 PY Danaher Income Statement and Balance Sheets 10-Year Summary (year ended December 31) Income Statement 10-Year Summary ($ in millions) EPS 3.95 CO 3.72 3.44 885.61 2.73 746.00 2.30 536.83 1.69 434.14 1.39 297.67 1.00 3,777.78 324.21 1.11 3,197.24 261.62 0.90 NO T 1,109.21 Balance Sheet 10-Year Summary ($ in millions) Current Assets Current Liabilities Long-Term Debt Shares Outstanding 17,458.03 7,649.47 2,553.17 318.4l 2007 17,471.94 8,386.25 3,395.76 318.0l 2006 12,864.1 6,219.49 2,422.86 308.2l 2005 9,163.11 4,082.76 857.77 305.6l 2004 8,493.89 3,874.21 925.54 308.9 2003 6,890.05 3,243.34 1,284.50 307.4 2002 6,029.15 3,019.55 1,197.42 305.1 2001 4,820.48 2,591.90 1,119.33 286.6 2000 4,031.68 2,089.35 713.56 284.0 1999 3,047.07 1,338.32 341.04 284.9 DO 2008 Data source: Danaher annual report, 2008. -13- UVA-BP-0549 Exhibit 3 Y P DANAHER—THE MAKING OF A CONGLOMERATE History of Acquisitions (partial list) Year 1984 1984 1984 1985 1986 1986 1986 1987 1989 1989 1993 1994 1994 1994 1994 1995 1996 1996 1997 1998 1998 1999 1999 2000 2000 2000 Key Acquisitions Dynapar Mohawk Rubber Company Master Shield Inc. Danaher Tool Group QualiTROL Chicago Pneumatic Western Pacific Industries Ammco Tools Inc. Easco Hand Tools, Inc. Veeder-Root Anderson Instrument Co. Delta Consolidated Industries Hengstler GmbH Armstrong Brothers Tool Co. Mark IV Industries Joslyn Corporation American Sigma Acme-Cleveland Gems Sensors & Controls Fluke Pacific Scientific Company Atlast Copo Controls Hach American Precision Instruments Kollmorgen Corporation Warner Electric Company Platform Process and controls Extruded products Vinyl products Tools and components Process and controls Tools and components Tools and components Automotive/transportation Tools and components Environmental—petroleum Industrial control Tools and components Industrial control Tools and components Industrial control Industrial control Environmental—water Industrial control Industrial control Test and measurement Motion Motion Environmental—water Motion Motion Motion O D Description Encoders for motor motion control Automotive tire products Building products Mechanic hand-tools Pressure gauge, diverse control instruments Tools, instruments Fasteners, screws, nuts, bolts Wheel service equipment Hand tools Gas pumps and dispensers, retail automation Instruments and controls for fluid processing Tool storage equipment for trucks Counter and encoder Industrial hand-tools Controls and Instrumentation division Electrical apparatus and controls Water quality monitors Industrial control and telecom test equipment Fluid sensors and controls Electrical and industrial testing meters Aircraft safety equipment Servomotor, drive and control Water analysis kits/instruments Motors and actuators Specialized servo and stepper motor systems Linear positioning equipment N T O O C Price Notes Undisclosed Undisclosed Platform establishing $60 million $52 million $170 million Platform establishing Undisclosed $167 million Platform establishing $245 million Undisclosed $200 million $147 million $625 million $420 million Undisclosed $325 million $186 million $267 million $147 million Platform establishing Platform establishing Platform establishing -14- UVA-BP-0549 Exhibit 3 (continued) Year Key Acquisitions Platform Y P Description Price Notes 2000 5 small acquisitions in electronic and network test, aerospace, environmental controls, and water quality 2001 United Power Corporation (UPC) Power conditioning Uninterruptable power systems 2001 Red Jacket Environmental—petroleum Gas pumps and dispensers, retail automation 2001 11 small acquisitions in electronic and network test, aerospace, industrial controls, and water quality 2002 Thomson Industries Motion Linear motion-control products $147 million 2002 Marconi (Videojet) Product identification Noncontact marking equipment $400 million 2002 Viridor Instrumentation Environmental—water Water quality instrumentation $137 million 2002 Gilbarco Environmental—petroleum Gas pumps and dispensers, retail automation $309 million 2002 8 small acquisitions in process and environmental control segments 2003 Willett International Ltd. Product identification Packaging code products Platform establishing 2003 Accu-Sort Systems, Inc. Product identification Packaging code products Platform establishing 2003 10 small acquisitions in process and environmental segments 2004 Radiometer S/A Medical technology 2004 Gendex (Dentsply) Medical technology 2004 Kaltenbach & Voigt GmbH (KaVo) Medical technology Dental diagnostic systems and lab equipment $412 million 2004 $185 million 2005 Trojan Technologies Environmental—water Water disinfection and wastewater treatment 10 small acquisitions in medical technology, electronic test, motion, environmental, product identification, sensors and controls, and aerospace and defense Leica Microsystems AG Medical technology Surgical microscopes 2005 Linx Printing Technology PLC $171 million 2005 11 small acquisitions in environmental and instrumentation segments 2004 O D T O N Product identification O C Critical care diagnostic instrumentation $109 million $108 million Undisclosed $343 million Platform establishing $166 million $312 million $684 million Dental treatment equipment High-speed printing applications Platform establishing $311 million $550 million $285 million Life sciences—potential -15- UVA-BP-0549 Exhibit 3 (continued) Year 2006 2006 Key Acquisitions Sybron Dental Specialties Vision Systems Ltd Platform Medical technology Medical technology 2006 2007 2007 ChemTreat Techtronix Environmental—water Test and measurement Y P Description Diversified dental professional products Life sciences instrumentation O C Industrial water treatment products Communication and signal-monitoring devices 2007 10 small acquisitions in professional instrumentation, medical technologies, or industrial technologies segments Source: Created by case writer from Danaher annual reports, 2000–08 and 10-K filings. T O O D N Price $2 billion $525 million $425 million $2.8 billion $273 million Notes To be paired with Leica -16- UVA-BP-0549 Exhibit 4 DANAHER—THE MAKING OF A CONGLOMERATE PY Danaher’s Original Businesses CO The precision components business unit, which later became the Danaher Tools and Components segment, had its beginnings in 1986 when Danaher purchased Western Pacific Industries, a manufacturer of fasteners and plastic products. In the first five years, the portfolio was expanded through acquisitions, most significantly when Danaher was selected by Sears, Roebuck & Co. to manufacture its Craftsman line of hand tools. Danaher also became the leading supplier of tools to the National Automotive Parts Association (NAPA). The precision and components subsidiaries came to manufacture such diverse products as Swiss screw machine parts, the famous Allen wrench, and drill chucks. Precision components became Danaher’s mainstay business and contributed up to 49% of overall revenues by 1991. NO T Automotive and transportation holdings focused on professional auto mechanic tools and transportation parts, considered to be a natural adjacency to the tools and precision products business by virtue of similar production methods and selling processes. As with precision components, this business unit continued to expand through several acquisitions including Coats, Jacobs, Fayette, Ammco Tools Inc., and Hennessy, which added wheel serving products, engine braking systems, tubular products, wheel balancers, tire changers, and brake repair components to the automotive portfolio. DO The instrumentation business unit was created in 1984 with the acquisition of Dynapar Corporation, a leading supplier of controllers to the industrial motor market. Danaher took the lead in speed control and sensor products for electric motors and drives, and by 1986, three additional acquisitions added pressure gauges, equipment protection devices, instruments, and communication devices for transmission and distribution systems for the electric, water, and oil and gas industries. Once expertise had been established in industrial controls, Danaher entered a market using similar products—retail gas dispensing—by acquiring Veeder-Root in 1985. The company supplied underground fuel storage sensors and instrumentation products to four out of every five gas pumps worldwide. Subsequently, the instrumentation unit began to branch into instrumentation and environmental controls. During the economic recession of 1989–93, the environmental controls business became Danaher’s fastest-growing business, aided by stringent regulation and increased demand for environmental products. Danaher’s extruded products division began in such areas as plastics manufacturing, rubber, and vinyl sidings; however, by the end of the 1980s, Danaher divested most of these holdings. Source: Created by case writer from Danaher 10-K filings. -17- UVA-BP-0549 Exhibit 5 DANAHER—THE MAKING OF A CONGLOMERATE DO NO T CO PY Strategic Platforms and Niche Lines Source: Created by case writer from Danaher 10-K filings. -18- UVA-BP-0549 Exhibit 6 DANAHER—THE MAKING OF A CONGLOMERATE $ 2007 3,537.9 709.5 64.8 20.1 1.8 $ CO Professional Instrumentation Sales Operating profit Depreciation and amortization Operating profit as a % of sales Depreciation and amortization as a % of sales PY Danaher Segment Financials, Year Ended December 31 (dollars in millions) $ T Medical Technologies Sales Operating profit Depreciation and amortization Operating profit as a % of sales Depreciation and amortization as a % of sales NO Industrial Technologies Sales Operating profit Depreciation and amortization Operating profit as a % of sales Depreciation and amortization as a % of sales DO Tools & Components Selected Financial Data Sales Operating profit Depreciation and amortization Operating profit as a % of sales Depreciation and amortization as a % of sales Segment Professional instrumentation Medical technologies Industrial technologies Tools and components $ 2007 2,998.0 393.2 119.7 13.1 4.0 2007 3,153.4 532.5 63.2 16.9 2.0 2007 1,336.6 175.6 20.8 13.1 1.6 $ $ 2006 2,906.5 625.6 48.8 21.5 1.7 2006 2,220.0 261.6 84.3 11.8% 3.8 2006 2,988.8 467.7 61.1 15.0 2.0 2006 1,350.8 194.1 21.4 14.4 1.6 Percentage of Total Sales 2007 2006 32 31 27 23 29 32 12 14 $ $ $ 2005 2,600.6 538.3 47.8 20.7 1.8 2005 1,181.5 138.7 44.2 11.7 3.7 2005 2,794.9 409.3 60.4 14.6 2.2 2005 1,294.5 199.3 22.8 15.4 1.8 2005 33 15 36 16 -19- UVA-BP-0549 Exhibit 6 (continued) Percentage of Total Sales $ NO Depreciation and Amortization: Professional instrumentation Medical technologies Industrial technologies Tools and components DO Capital Expenditures, Gross Professional instrumentation Medical technologies Industrial technologies Tools and components 17,471.9 $ $ 2005 2,589.0 2,408.6 3,158.9 785.8 220.8 12,864.2 $ 9,163.1 1,286.7 1,489.7 829.0 214.8 4,566.0 $ 784.2 1,482.3 832.5 238.7 2,881.8 $ 794.9 855.2 897.3 240.9 1,294.4 $ 8,386.2 $ 6,219.5 $ 4,082.8 64.8 119.7 63.2 20.8 268.5 $ 48.8 84.3 61.2 21.4 215.7 $ 47.8 44.2 60.4 22.8 175.2 39.0 47.6 48.0 20.9 $ 34.5 31.6 44.7 25.6 $ $ $ $ Other Data source: Danaher annual report, 2008. 2006 2,691.0 5,534.1 3,623.7 824.4 190.8 $ T Liabilities: Professional instrumentation Medical technologies Industrial technologies Tools and components Other $ CO $ 2007 6,692.0 6,160.6 3,536.2 801.1 282.1 PY Identifiable Assets: Professional instrumentation Medical technologies Industrial technologies Tools and components Other $ — 6.5 $ 162.1 $ $ 136.4 32.3 16.1 47.9 23.4 — $ 119.7 -20- UVA-BP-0549 Exhibit 7 Y P DANAHER—THE MAKING OF A CONGLOMERATE Danaher Corporate Organization Structure T O O D Source: Created by case writer. N O C -21- UVA-BP-0549 Exhibit 8 Y P DANAHER—THE MAKING OF A CONGLOMERATE Danaher Platform Organization Structure O C EVP and group executive SVP Headquarter Business A President Business 1 SVP Headquarter Business B SVP Headquarter Business C T O President Business 2 President Business 3 Finance VP Operations VP Marketing VP Sales Line Managers N Factory Managers O D Source: Created by case writer. Product managers Business Development Legal Other support functions Integration team Finance Marketing Operations HR & Legal DBS Experts New MBA’s -22- UVA-BP-0549 Exhibit 9 DANAHER—THE MAKING OF A CONGLOMERATE PY DBS/Kaizen Case Study Daniel Even, president of Sybron Dental Specialties, reflected on his experience postacquisition to the editor of Dental Economics: NO T CO Our first kaizen was on the factory floor. We have a product, the clear ceramic ortho bracket, which is very difficult to make. Any slight variation in the manufacturing process causes the material to chip or fracture, and we end up with a lot of scrap. Even though the materials to build this product are very expensive and the time to build it is lengthy, it’s a very important product for us because patients want braces that don’t show. This product is ground out of a block of crystal; the crystal itself is actually grown. On top of that, it has to cure for a long time. The entire process takes almost 24 days and takes up a lot of floor space. During this kaizen, we literally reduced floor space by 30%, and we significantly decreased the number of days it takes to build the part to six days. So, we ended up with the same quality product but with less floor space and a faster delivery time to the customer. DO Data source: Dental Economics, February 16, 2007. -23- UVA-BP-0549 Exhibit 10 DANAHER—THE MAKING OF A CONGLOMERATE PY Danaher Corporate Values The Best Team Wins CO Associates are our most valued assets. We’re passionate about retaining, developing and recruiting the best talent available. Danaher and its associates win because: We are team-oriented with involvement by all. We seek fact-based, root cause solutions; not blame. We are accountable for results, and we deliver. We are nonpolitical and not bureaucratic. We have high integrity and respect for others. Winning is fun! Customers Talk, We Listen NO T Quality First, ALWAYS! We base our strategic plan on the voice-of-the-customer. Robust, repeatable processes yield superior quality, delivery, and cost that satisfy our customers beyond their expectations. Continuous Improvement (Kaizen) Is Our Way of Life The Danaher Business System IS our culture. We aggressively and continuously eliminate waste in every facet of our business processes. Leading Edge Innovation Defines Our Future1 DO We continuously apply our creativity to the technologies of products, services, and processes. Out-of-the box ideas, both large and small, add value to our enterprise. We accomplish breakthroughs through the policy deployment process. We Compete for Shareholders Profits are important because they attract and retain loyal shareholders. 1 Danaher began to emphasize innovation in 2000. -24- UVA-BP-0549 Exhibit 10 (continued) Danaher’s Corporate Mission PY We strive to create shareholder value through: delivering sales growth, excluding the impact of acquired businesses, in excess of the overall market growth for our products and services; upper quartile financial performance compared to our peer companies; and upper quartile cash flow generation from operations compared to our peer companies. CO To accomplish these goals, we use a set of tools and processes, known as the DANAHER BUSINESS SYSTEM (DBS), designed to continuously improve business performance in the critical areas of quality, delivery, cost, and innovation. DO NO T Data source: Danaher annual report, 2008. -25- UVA-BP-0549 Exhibit 11 DANAHER—THE MAKING OF A CONGLOMERATE Strategic Considerations DO NO Source: Created by case writer from public sources. ROIC: 10% after tax within three years EPS accretion Free cash flows in excess of earnings Assessment of cost structure Price CO Industry fit (manufacturing, tools) Cultural fit Adoption of DBS Bolt-on, platform-enhancing Quality, delivery, and innovation Market share leadership Brand strength (goodwill) Counter-cyclicality Financial Considerations T PY Danaher Acquisition Guidelines -26- UVA-BP-0549 Exhibit 12 DANAHER—THE MAKING OF A CONGLOMERATE Reactions at Danaher MBA on leadership development track PY CO They took over our private company preaching their DBS culture with no respect for people. New managers took over and laid off the managers left at the company. The rest left voluntarily. I would say, Danaher is a good company, just look at the outstanding financial results, but their corporate managers have gone too far, and they have not paid attention to the local management. DO Current employee T Current employee Our organization has embraced DBS. At the first kaizen, we became believers at what we could accomplish through this methodology. The experience is incredibly exciting because of the impact we see within the first couple of hours of a kaizen. We actually move things on the floor and see results very quickly, which builds an incredible amount of momentum. As people see the results, they become more engaged. We end up working long hours because we’re so eager to get to the finish line and implement the tools to their fullest extent. It’s very energizing and exciting and high impact. It has become impossible for management within Danaher company to make any decisions or “run” their company on their own. The corporate management is micromanaging everything! The spread of funds over ALL companies makes it difficult to do anything when you could be doing better on your own. Danaher provides a place to grow and improve as the company is all about growth and continuous improvement. The company relies on self-motivated leaders to define their own path and forge ahead smartly to achieve whatever they want. Danaher provides tools and frameworks for you to achieve, but if you need structure, this is not the place for you. If you want to create/find opportunity and develop it into a profitable growth business, look here. The growth of your responsibility is only limited by your ability to produce results. NO Group/platform executive Manager Manager Danaher corporate has a lot of good ideas and really tries to incorporate the companies they purchase into the DBS; however, old management has a hard time correctly adapting the DBS concepts and quickly delegates blame to cover up its own mistakes. Danaher must become more customer focused and less focused on monthly revenue. Place more emphasis on new product development and stop trying to suck more income out of old products. Data source: http://www.glassdoor.com/Reviews/Danaher-Reviews-E193.htm.