Forbes magazine three decades ago famously derided them as “callow youths” and “raiders in short pants.”
Since then, Washington’s most unfamous brothers have stayed largely out of the public eye, or as invisible as two people can be when they pile up a world-class art collection, collect motion picture awards and — each — amass $4 billion fortunes.
Steven and Mitchell Rales, 63 and 58, instead let their financial wizardry speak for itself. They built District-based Danaher Corp. into an unglamorous, cash-producing conglomerate that owns a passel of no-name industrial and commercial manufacturers and has a market cap worth $62 billion on annual revenue of $20 billion.
After a 30-year run, Danaher is now ready for a new act. The company last week declared it would split itself into two parts — one aimed at science and technology growth opportunities and the other at the more traditional manufacturing business.
The Danaher name goes with growth. The spinoff, called NewCo for the time being, is to be named later.
One analyst implied the split had an air of inevitability.
“They were legendary,” said Paul Knight, an analyst with Janney Montgomery Scott LLC. “But you know, the industrial market was not allowing them to be legendary anymore. You had international competition really emerge with China becoming an industrial force, other parts of Asia becoming more competitive. Today the real strategy is unveiled. They are no longer the Danaher industrial of the last 30 years. It’s a new Danaher.”
The Rales brothers, who each own 6 percent of Danaher shares, did not respond to requests for interviews that were made through the company’s public relations firm, Sard Verbinnen & Co.
Their company is named for the brothers’ favorite trout-
fishing river in Montana and is Washington’s version of a downsized General Electric.
Its portfolio, cobbled from dozens of acquisitions — some friendly, some not — would put most millennials to sleep but tickle any investor pink: fuel pumps, dental appliances, water treatment equipment, tools.
The strategy was this: Buy unloved, also-rans filled with potential. Drive out costs. Apply state-of-the-art business practices from its pillar Danaher Business System (DBS) to boost margins. Repeat.
“The Rales brothers have made a fortune at finding those diamonds in the rough, those high school truants who end up doing very well when you pay a little attention,” said Michael Farr, president of Farr, Miller & Washington LLC, a District investment firm that owns Danaher stock on behalf of its clients.
Despite their allergy to media attention, the brothers occasionally venture into more conspicuous pastimes that draw them into the public eye.
Steven, who lives in Santa Barbara, Calif., owns a film production company called Indian Paintbrush that has funded award-winning films such as “The Darjeeling Limited” and “The Grand Budapest Hotel.”
Mitchell is local. His 25,000-square-foot Glenstone museum, now undergoing an expansion after receiving permission from Montgomery County to get a sewer line installed, houses one of the foremost post-World War II art collections in the world, with works by Calder, Matisse and Rothko. Mitchell has been a regular at the annual Fight Night event, Washington’s politically incorrect spectacle (women in slinky gowns fetching drinks for the mostly male clientele) that raises money for low-income children.
A standout athlete at Walt Whitman High School, he has sniffed around both the Redskins and Wizards when they were for sale, but he owns neither.
In 2012, with his sewer proposal opposed by some environmentalists, he and his wife, Emily, granted The Washington Post its first interview in 27 years as part of the museum’s effort to “at least put our best foot forward.”
They both reportedly own eye-popping properties on Mount Desert Island, Maine.
The business side is far less glamorous. Danaher’s arc traces back to their father’s roots in real estate and the brothers’ talents for financial engineering, especially by Steven, who has a law degree from American University and is believed to be the financial maven. Mitchell takes care of the operational sides of the businesses.
Early on, Forbes wrote a stinging piece that raised questions about how they funded their acquisitions, such as tire maker Mohawk Rubber.
“They paid $92 million, all but $2 million borrowed,” the Forbes piece said. “That’s leverage for you: Few ordinary businessmen could sleep nights under such leverage, but, remember, the Raleses are more like real estate speculators than industrialists.”
The same piece included a reference to Scott Fetzer, an Ohio-based mini-conglomerate that the Raleses were intending to purchase until investor Warren Buffett swooped in at the 11th hour, grabbing the company because, the magazine implied, Fetzer trusted Buffett’s source of money more.
Still, the Raleses found a groove, investing in radio stations, vinyl siding and a real estate investment trust.
As the acquisitions mounted, so did the profits and the accolades, including more than one acknowledgment by Forbes that the brothers are the real deal.
Danaher isn’t the only public company they spawned. They launched Colfax, an Annapolis Junction-based public company that makes and services pumps for fluids and for gases, including oil pipelines and offshore rigs.
Danaher is the flagship, riding its Danaher Business System into years of success. DBS’s motto is “Kaizen is Our Way of Life,” referring to the Japanese business practice that espouses continuous improvement.
Preaching Kaizen, they became experts at going out and finding underperforming businesses and doubling their profit margins. Some investors just held on and rode the returns. The late Joe Robert, a local businessman and philanthropist who brought Fight Night to Washington, told a Post reporter that he had most of his holdings in Danaher stock. Other noted investors, including the Sequoia Fund, have been longtime holders of Danaher.
“It’s a black box of sorts, like Goldman Sachs,” said Keith Davis, an analyst for Farr. “You don’t know how they are generating the profits and money, but they have been able to do so consistently and for so long that you kind of have to take a leap of faith that they are going to continue.”
True to form, the Danaher split was accompanied by the announcement of yet another acquisition, this one its biggest yet: the $13.6 billion purchase of Pall Inc., a Long Island-based manufacturer of water filtration equipment for businesses and water utilities.
The new Danaher as well as Pall generated $16.5 billion in revenue in 2014, according to Danaher’s release accompanying the announcement. Danaher looks to improve upon that growth rate going forward, with DBS driving $300 million worth of “cost synergies” from the combined company over the next several years, which will go right to the bottom line.
“Danaher will be a more-focused science and technology growth company united by common business models with attractive characteristics,” said Danaher chief executive Tom Joyce in an analyst call earlier this month. “The company will have leading positions in favorable markets, which we believe will help support mid single digit organic growth.”
NewCo will harbor the old-line businesses, which have combined revenue of around $6 billion. Danaher veteran executive James Lico will become its chief executive. The brothers will serve on the board of the new company.
“We view the breakup as a modest positive, but not game changing,” analyst Steve Tusa with JPMorgan said in a note issued after the split was announced. “It will create more focused enterprises, allowing each to reinvigorate growth via [mergers and acquisitions].”
Danaher, now headquartered a few blocks from the White House, appears to be staying in Washington after the separation, slated to be completed by the end of 2016.
The location of its spinoff is less clear.