Danaher Thrives on Discipline

By Jerry Knight
Monday, January 30, 2006

For the chief executive of an $8 billion-a-year business that grows by making acquisitions, Danaher Corp. President H. Lawrence Culp Jr. has an impressive ability to say no.

He said no last September, when District-based Danaher was asked to raise its bid for Leica Geosystems AG, a Swiss maker of surveying instruments.

He did it again last week, refusing to boost Danaher's bid for First Technology PLC, a British firm that manufactures electronic testing equipment and crash-test dummies.

Danaher was bidding against Honeywell International Inc. for First Technology and appeared to have won the auction with a $634 million offer. But last Tuesday, Honeywell raised its bid to $718 million.

Danaher didn't bite.

Following the poker rule to "know when to hold 'em, know when to fold 'em," Culp's dealmakers walked away from the table, refusing to match Honeywell's bid.

While Danaher missed the opportunity to acquire a business that analysts said would have fit nicely into its test-equipment operations, it probably still will make money on the exercise. Danaher had acquired almost 15 million shares of First Tech and could make close to $1 a share by selling them to Honeywell.

Danaher executives did not return phone calls seeking comment on First Technology, but Culp talked about the transaction that didn't happen Thursday during a conference call with analysts after Danaher reported a record 2005 profit of $907.7 million, up from $746 million the year before.

"How do you stay disciplined?" Culp was asked. How do you resist the temptation to put a few million more on the table to get what you want?

"For us, staying disciplined is easy because that's the only way we know how to play the deal game," Culp said. He assured investors that they don't have to worry about the company "doing something that would not create value for Danaher shareholders."

"There are auctions all the time," he said, noting that Danaher won the bidding last year for Leica Microsystems AG-- a maker of microscopes -- but lost in the auction of Leica Geosystems. (Both are siblings of the legendary Leica Camera AG.)

"When we need to play the game, we will be aggressive but we will be disciplined," Culp said.

Analysts liked that answer. Though Danaher shares have gained only a little more than 1 percent over the past 12 months, Wall Street fawns over the company. Shares closed Friday at $55.55, up 25 cents.

Of all the stocks in the Standard & Poor's 500-stock index, only 11 get higher analyst ratings than Danaher, the Bloomberg financial news service reported Friday in its weekly ranking of stocks that win the best and worst grades from Wall Street. There are 14 investment firms that rate Danaher stock "buy," two that give it a "hold" and just one that rate it "sell," according to Bloomberg.

When Danaher came in second in the bidding for First Technology last week, the response from analysts was not that Danaher had lost, but that Honeywell had blundered by paying too much.

No one complains about Danaher not making enough deals. How could they? As Culp pointed out, Danaher made 16 acquisitions last year and budgeted $5 billion for acquisitions over the next three years.

Those purchases are rapidly transforming the business of Danaher, a highly diversified manufacturing conglomerate whose home office is in the District but whose operations are worldwide.

The company is still most often referred to as "the maker of Sears Craftsman hand tools" but that description becomes less accurate every time Danaher buys a new operation.

First, Danaher makes only Craftsman mechanics' tools -- wrenches and the like. Other companies produce all sorts of products sold under the Craftsman brand.

Second, since Sears was purchased by Kmart Holding Corp. last year, the Craftsman business is not what it once was. "A bit of a wild card," Culp called it last week. At one point, Danaher was expected to benefit from the Sears-Kmart marriage because Craftsman tools would be sold in Kmart stores. But struggling Sears has cut back its inventory of tools, and analysts at Wachovia Corp. now call Craftsman the laggard in Danaher's hand-tool division. Growth in the division comes from professional-grade tools that are sold directly to mechanics and from increasing sales of hand tools to the Lowe's home-improvement chain.

Danaher's tools and components division is the smallest of Danaher's three operating units and the only one whose sales slipped last year. The division generated $1.3 billion in revenue last year, down $12 million from 2004.

Danaher's growth engine is its professional instruments division, which produced about half the company's sales last year, growing to $3.8 billion in revenue, from $3 billion. You'll find the names of Danaher companies on such things as pumps at gas stations (Gilbarco Veeder-Root) to the equipment in your dentist's office (Pelton & Crane and KaVo dental equipment and Gendex X-ray machines). The company is a major player in water treatment and testing equipment. This month, it paid $75 million to buy Visual Networks Inc. of Rockville, which makes hardware for managing communications networks.

Danaher's industrial technology division grew to $2.9 billion in revenue last year, from $2.6 billion in 2004. The specialties in that division are what Danaher calls "motion" -- a broad handle for motors and other devices that make things move -- and "product identification," which tracks items with bar codes and radio frequency identification tags. The division is working with Wal-Mart Stores Inc., whose goal is to be able to track every item that moves through its mammoth distribution system.

While its operations are almost too varied to classify, the common denominator is that Danaher companies make things. And it pledges to make them "better, faster and cheaper."

Those words are the mantra of what the company calls the "Danaher Business System, " a near-religious devotion to making its companies operate more efficiently.

Danaher executives like to talk about the company's ability to generate "organic growth" even in what are often regarded as mature businesses that peaked long ago.

But Danaher's businesses are growing at a low single-digit rate. Acquisitions are the real driver of the company's growth, contributing most of its 16 percent increase in revenue last year. The 16 acquired companies added about $900 million to Danaher revenue. Three-quarters of that came from Leica Microsystems, Pelton & Crane and British printing company Linx PLC.

When a company grows by acquisitions, the willingness to just say no becomes crucial to its future.

Danaher has proved its willingness to walk away from potential deals that don't meet its standards for profitability, return on investment and other financial goals. Usually that happens without anyone even knowing Danaher was looking at a company. Then there were those two cases in recent months in which Danaher demurred after public offers were on the table.

Maybe twice isn't a trend, but it's a hint that the asking prices for the kinds of companies Danaher likes to buy may be getting too high.

When that happens, aggressive acquirers either have to put aside their reservations and pay up, or drop out of the game. Culp has signaled Danaher's dedication to discipline, but if opportunities dry up, he may find it more difficult to say no.

Jerry Knight's e-mail isknightj@washpost.com.

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