The big idea: After slashing its dividend and seeing its share price plummet over the last 12 months, struggling General Electric ousted chair and CEO John Flannery after only a year on the job. In his place, the company looked to Lawrence Culp, who as Danaher CEO from 2001 to 2014 quintupled the company’s revenues and delivered total shareholder return of more than 450 percent.
Culp first joined Danaher in 1990 and helped the company evolve the successful model of operation called the Danaher Business System (DBS), which combined lean manufacturing techniques pioneered in Japan and cash management policies that prioritized cash generation.
When Culp took the helm in 2001, his job was to continue the company’s 20-year track record of above average profitability and healthy stock prices by growing the DBS to a global scale.
The scenario: Throughout its history, Danaher had always relied on acquisitions for growth.
Before Culp took over as CEO, the company’s lean manufacturing and cash focus created a cash-generating machine capable of acquiring a dozen or more companies per year. These acquisitions all fit into Danaher’s four market segments — Industrial Technology, Professional Instrumentation, Tools and Components, and Medical Technologies — and were either “bolt-on” acquisitions to existing “business platforms” within those segments or were used to launch new business platforms. At Danaher, business platforms were simply lines of business such as mechanics’ hand tools or dental technology.
During Culp’s first years as CEO, the acquisition-heavy strategy drove tremendous success. The company built a dominant position in the manufacturing and sale of fuel-dispensing technology thanks to new acquisitions in 2001 and 2002. In 2002, acquisitions allowed the company to launch a new product-identification platform, which designed, manufactured and sold commercial printing equipment. Danaher became the second-largest dental products company in the world in 2004 after acquiring a number of European dental companies that bolted on to its dental technology platform within the Medical Technologies segment.
Not every acquisition was easy. The Danaher Business System was rigorously applied to new companies added to the Danaher portfolio, with the expectation that they would assimilate the strict Danaher culture within 12 months. The culture shock could create friction.
When Danaher acquired Tektronix in 2007 for $2.8 billion, the deal doubled the size of its electronic test and measurement platform. However, Tektronix employees, who were used to a unique culture of individual freedom, trust and reliance on independent judgment, struggled with the harsh change that came with Danaher’s new management philosophy.
The resolution: Under Culp, Danaher managed to overcome and sometimes even avoid cultural friction through a rigorous set of screening processes using strategic and financial criteria to evaluate overall strategic fit of any potential acquisition. The screens included an evaluation of the likelihood the Danaher Business System culture could be deployed successfully.
Even while often bidding against well-heeled global conglomerates such as GE and Honeywell, Danaher’s deal-making continued right into the financial crisis, with 11 acquisitions totaling $2.7 billion in 2006, 12 acquisitions for $3.6 billion in 2007 and 17 acquisitions for $423 million in 2008.
Even in the face of challenges such as Tektronix, Danaher maintained an unwavering commitment to its post-merger integration game plan, which focused not only on implementing DBS but identifying top talent within acquired companies and offering opportunities to grow into larger roles at Danaher.
Danaher’s share price quadrupled from 2000 to 2008. Even when the financial crisis took a bite out of the company’s stock and analysts began to doubt if the acquisition strategy could drive the same historical rate of growth, Danaher remained committed to its core strategy and principles. In the final five years of Culp’s tenure as CEO, the company proved its doubters wrong, as its stock price in 2014 more than doubled its prerecession highs.
Under Culp, what began as a sub-$1 billion revenue industrial goods manufacturer became a global industrial conglomerate with $19 billion in sales and surging shareholder returns — something GE’s board is surely hoping Culp can restore at the venerable corporate giant.
The lesson: Whether facing a recession or doubts from the market or a cultural challenge from an important acquisition, a vigorous commitment to core cultural values and an inimitable operational philosophy can steer a ship through many storms.
L.J. Bourgeois III and Sriram Nadathur (MBA ’09) authored the case Danaher — the Making of a Conglomerate (Darden Business Publishing).