By Thomas Heath
Monday, July 7, 2008
Staff writer Thomas Heath's Value Added column appears Tuesdays on the WashBiz blog. Most weeks, it profiles local entrepreneurs, discussing how they make money and what they do with it.
So which two local business legends braved an economic downturn and an all-but-dead IPO market and took public a boring pump company based in Richmond?
And now, with the firm valued around $1.1 billion, own $220 million each in company stock?
And can't even count it as their biggest home run?
The Rales brothers -- two of the richest guys in Washington -- are still printing money.
Mitchell P. and Steven M. Rales, who went to Walt Whitman High School in Montgomery County, are already worth billions from their flagship industrial firm, Danaher, based in the District and named for their favorite trout-fishing stream in Montana.
Forbes recently placed Mitchell as the 412th-wealthiest person on earth, at $2.8 billion. Steve ranked 446th, at $2.6 billion.
But they made a significant leap in net worth in May with the initial public offering of their latest home run, Colfax, which friends say is the name of an elementary school the brothers attended.
Colfax is a lot like Danaher, which makes unglamorous stuff like measuring tools, dental-office instruments, water-treatment equipment and microscopes. Ever hear of Craftsman hand tools? That's Danaher.
Now comes Colfax, founded as a private company in 1995 and "a global leader in critical fluid-handling solutions," according to an SEC document.
Colfax makes industrial pumps.
Lots of money is flowing through those pumps. In the first quarter of this year, Colfax sold $130 million worth of pumps and had $6.8 million in profit. The company recently was awarded a $1.3 million contract for work on British navy patrol vessels.
Each Rales brother owns more than 9.1 million shares of Colfax, a stake valued at about $220 million each at Thursday's price.
So I got a call from a noted Washington business wag: "You've got to write about the Raleses. They take a billion-dollar company public when no one is doing IPOs. They make a few hundred million apiece. It's amazing. Just leave me out of it."
No surprise there.
This wag and others spoke on condition of anonymity because they said the Raleses would be offended by anyone talking about them, even if they say something nice. The Raleses are notoriously reclusive, like the Mars candy family.
Washington venture capitalist Mark Frantz, who cut his teeth at the Carlyle Group, the private-equity giant in the District, said everyone knows of the Rales brothers' success. But Frantz wasn't afraid to talk about it.
"These guys are brilliant," he said. "They are just freaking brilliant. These are massively dynamic guys doing non-sexy stuff and, God forbid, they are making tons of money."
Another Rales business associate who spoke on condition of anonymity put it this way: "Everything they touch turns to gold. They own lots of things you have never heard about."
The Raleses over the past two decades have built Danaher into a mini-General Electric. Danaher, which has a market capitalization of about $24 billion, is known for its Danaher Business System, a super-efficient manufacturing process modeled after the Toyota Production System.
Danaher shareholders have done well. From 1997 through 2007, total annual return was 19 percent. If you bought $10,000 of stock in early 1997 and reinvested its dividends, your shares would have been worth $67,766 at the end of last year.
The Rales brothers didn't respond to inquiries. So I asked a former employee and a business analyst how they do it.
"They are very shrewd businesspeople, and they have a knack for selecting management talent that knows how to win," said Mark DeLuzio, a former Danaher executive who was instrumental in developing DBS. "And they know how to get out of the way and let people run the company."
Ned Armstrong, a managing director at Friedman, Billings, Ramsey Group in Arlington, said the Rales brothers do three things right: They don't overpay pay for acquisitions. They control costs. And they hire smart people.
"People who invest in Rales brothers enterprises for the most part made very good returns," Armstrong said.
What do the brothers do with all that money?
Equity Group Holdings, the brothers' private investment vehicle, shares space with Danaher on Pennsylvania Avenue.
Mitchell has been a big supporter of local children's charities. Steven is a major donor to his alma mater DePauw University, the Indiana liberal-arts college known for its school of music.
Both Rales brothers -- each is in his 50s -- collect modern and contemporary art. Mitchell turned his Potomac home into an invitation-only museum called Glenstone. I'm waiting for an invite. He also sits on the National Gallery of Art's board of trustees. ArtNews a year ago called Mitchell one of the 10 most important art collectors, alongside the buyout king Henry Kravis and the perfume heir Ron Lauder.
Steven has taken to funding small, offbeat movies. He is listed as an executive producer for "The Darjeeling Limited" and for the upcoming "The Fantastic Mr. Fox."
Then there's the fantastic fortunes of the Brothers Rales.