Takeover wizards

By BOB DRUMMOND


Early in their careers as takeover artists, brothers Steven and Mitchell Rales butted heads with a master of acquisitions, Berkshire Hathaway's Warren Buffett.

After the Rales brothers' fledgling Danaher Corp offered about US$40 million in a 1985 hostile bid for Cleveland firm Scott & Fetzer - which sold World Book encyclopaedias and Kirby vacuum cleaners - Buffett rode in from Omaha, Nebraska, as a white knight and won the prize for US$410 million.

In the almost two decades since they set up Danaher in September 1984, the Rales brothers and their Washington company have not given up much to Buffett or anybody else. The shares of Danaher, whose market value has grown during that time to US$14 billion from US$70 million, rose 39.8 per cent last year compared with Berkshire Hathaway's 15.8 per cent.

That was no fluke: Danaher has outperformed Buffett's company over the past three years - and the past five years, 10 years and 15 years.

That sort of record occasions the question, Dana-who?

"It is kind of a sleepy, below-the-radar company," says Robert Mitchell, an investment manager at Chicago-based Northern Trust Corp, which owned 4.1 million worth of Danaher shares, or 2.7 per cent, at the end of last year.

"They make products people, by-and-large, have never heard of. They're kind of behind-the-scenes industrial products."

Danaher has grown through acquisition, buying companies that manufacture wrenches, bar code scanners, water quality tests, oscilloscopes, voting machines and the tiny motors in heart pumps, among hundreds of sundry items.

It is among the 10 biggest holdings in Mitchell's US$775 million Northern Growth Equity Fund.

"They don't look for publicity," Mitchell says. "They just do a great job."

During the decade ended on December 31, Danaher investors received better returns than shareholders of Citigroup, General Electric, Intel, Southwest Airlines and Wal-Mart Stores.

A US$1000 investment in Danaher on the last day of 1984 was worth almost US$105,000 at the end of last year. That compares, among diversified manufacturing companies, with about US$25,000 for Tyco International, US$24,000 for Illinois Tool Works, US$15,000 for ITT Industries and US$9000 for 3M.

During the past 20 years, Danaher shares returned an average of more than 31 per cent a year, more than twice the Standard & Poor's 500 Index's annual average of 14 per cent.

Over 10 years, Danaher stock returned 28 per cent compared with the S&P 500's 13 per cent increase.

Danaher, whose best-known products are Craftsman-brand tools sold by Sears Roebuck, may be the best-kept secret in the sharemarket. And the Rales brothers - who own a combined 22 per cent of the company, a stake worth US$3 billion - are not keen on discussing the keys to its success.

Steve, 53, Danaher's chairman, and Mitchell, 47, executive committee chairman, don't give interviews.

Their reticence extends to their Danaher colleagues.

"We don't actively seek publicity," says Dan Gagnier, of the New York public relations firm Citigate and Verbinnen, which represents Danaher.

The company, which does not have its own public relations staff, refused to make either of the Rales brothers, or any other executives, available for interviews.

That's fine, as far as some Danaher shareholders are concerned.

"It's not a household name but it's a very well-managed company that has the earnings and cashflow to more than justify the stock performance," says Larry Puglia, manager of the US$7.3 billion T. Rowe Price Blue Chip Growth Fund.

Baltimore-based T. Rowe is Danaher's third-biggest shareholder, excluding the Raleses, with 5 million shares, or 3.3 per cent of the stock.

David Scott, who helps to manage US$2.4 billion at Chase Investment Counsel Corp, says the Rales' anonymity sets a tone for top executives, keeping them focused on finding acquisition targets and efficiently folding them into the company.

"It's a plus, quite frankly," he says, contrasting the quiet Rales brothers with former Tyco International chairman Dennis Kozlowski, who threw a company-subsidised US$2 million birthday party for his wife on the Italian island of Sardinia.

"They're not looking to get a high profile and spend time on public relations when they ought to be running a company," Scott says.

Steve and Mitch Rales are two of the most tight-lipped billionaires around. They don't make speeches or sponsor society bashes, and their pictures are not in Danaher's annual reports.

The company's headquarters shares space with Equity Group Holdings - the Rales brothers' private investment partnership - on the top floor of a silver, 12-storey office building on Pennsylvania Ave, about five blocks west of the White House.

Nothing on the outside of the building hints that one of Washington's two S&P 500 companies - Fannie Mae is the other - has its headquarters within. In the elevator lobby, Danaher's name appears on a single line in the building's directory.

While FedEx says it pays about US$7.5 million a year to put its name on the Washington Redskins football stadium, Danaher does not even pay the US$9.25 monthly fee to have a boldface listing in the Washington telephone book.

The company outlined its acquisition strategy in its 1986 annual report: "As we pursue our objective of becoming the most-innovative and lowest-cost manufacturer of the products we offer, we are seeking a market position with each product line that is either first, second or within a very distinctive market niche."

From day one, Danaher has grown by acquiring other companies.

Steve and Mitch Rales took over a West Palm Beach, Florida company that invested in retirement home developments and on September 24, 1984, changed the name from DMG to Danaher - after the Danaher River in western Montana.

The brothers conceived the idea for a company during a fishing trip there, according to Danaher's annual reports.

From then on, as Buffett had done after buying a textile maker called Berkshire Hathaway, the Rales brothers used the former real estate company as a vehicle for acquisitions.

Danaher's takeovers have transformed the company more than once. In 1985, the first full year under the Danaher name, 86 per cent of its revenue came from tyres and rubber goods.

By 1991, after Danaher won the rights to make items under Sears' Craftsman brand-name, tools and automotive equipment accounted for 78 per cent of sales.

Last year, Danaher earned 77 per cent of its revenue from water-testing kits,precision motors, voltage meters and other products in what it calls the process and environmental controls segment.

Danaher's share price, meanwhile, rocketed to US$91.75 on the last day of 2003, from a split-adjusted 88USc at the end of 1984.

Sales last year grew for the 12th year in a row, rising to US$5.3 billion from about US$950 million over that time.

Consumers run into Danaher products just about every day, though most do not recognise them.

Petrol pumps at the neighbourhood service station may have been made by Danaher's Gilbarco unit.

The hexagonal Allen wrench in many toolboxes was made by Danaher, as was the hardware on power poles that carry electric, telephone and cable TV lines.

In Danaher's early years, the Rales' relative youth and their use of junk bond financing arranged by Drexel Burnham Lambert's Michael Milken for some acquisitions drew unflattering notices.

A Forbes magazine story in 1985 - when Steve Rales was 34 and Mitch was 29 - called the brothers "raiders in short pants" and "callow youths", adding that they were "cocky to the point of foolishness". Business Week later wrote that the brothers represented a "new crop of takeover tyros".

The brothers' public silence started about that time.

"They got some bad press at one point, and after that, they just didn't trust the media," says Robert Lietzow, 39, managing partner of Lakeway Capital in El Segundo, California, who worked for Equity Group in the late 1980s and early 1990s.

"I don't blame them."

Before shunning interview requests, Steve Rales told Forbes during the 1985 tussle over Scott & Fetzer that Danaher would "look very strongly at anything that has a consumer brand-name associated with it".

After another unsuccessful run at a consumer products company - a 1988 bid for Interco, the maker of Ethan Allen furniture, London Fog raincoats and Converse basketball shoes - Danaher turned its attention primarily to buying companies that were industry leaders with brand-names known in their own markets, if not to the public at large.

In seeking companies to acquire, Danaher scouts for industries in which it may be able to create a dominant competitor and improve efficiency by combining several companies.

Danaher saw an opportunity five years ago in the making of precision motors used in semiconductor manufacturing and chemical laboratories, the company wrote in a letter to the Securities and Exchange Commission.

"We identified the 'precision motion control' market as an underserved and fragmented industry."

From March to July 2000, Danaher bought three companies in the motor market for more than US$750 million in cash and assumed debt, according to SEC filings.

After the acquisitions, Danaher fired 1745 employees and closed 13 plants as it combined their operations.

In 2001, motion control products ranked second in sales among Danaher's business unit, trailing only hand tools, according to SEC filings.

Expanding through acquisitions, Danaher has bought companies in good and bad markets.

It took over eight companies for about US$860 million in 2000, a record year for global mergers and acquisitions.

Danaher made 12 acquisitions worth a total of about US$1.2 billion in 2002, the worst year for mergers since 1997.

Even with their penchant for privacy, the Rales turn up occasionally in the news. Steve Rales' former wife last year filed papers in their divorce that accused him of trying to steer his car into her path in the driveway of a girls' school, according to the Washington Post.

The filing was an effort to use Steve Rales' publicity shyness to pressure him into a settlement, the paper said.

About two months later, a settlement was reached that sealed the case files from public view, according to District of Columbia Superior Court records.

Danaher has drawn some unflattering attention from activist investors such as Calvert Group, which is pushing for a shareholder vote on promoting diversity among the company's directors and executives.

In last year's annual report, Danaher listed 50 directors, executives and operating company presidents. All of them were men.

"We believe boards should look like America, and half of America is women," says Julie Gorte, Calvert's director of social research.

"We need diverse perspectives and not just management's friends recruited on the golf course."

A similar proposal drew almost 29 per cent of the vote at Danaher's annual meeting last May, Gorte says.

In July, Danaher expanded its board, adding John Schwieters, 64, vice-chairman of investment firm Perseus.

That increased the number of men on the board from eight to nine.

From the earliest days, the Rales brothers have overcome their critics with those lofty returns.


* Based Washington, DC

* Sales (2003): US$5.29 billion

* Net profit (2003): US$536.8 million

* Employees: 30,000

* Activities: process controls, electronics, hand tools.

* Board chairman: Steven Rales

* Executive committee chairman: Mitchell Rales