Danaher Corporation - Fallstudienbearbeitung PDF

Preview

Summary

Fallstudienbearbeitung...

Description

Danaher Corporation 1. What, other than Danaher Business System, account for the success of Danaher Corporation? Once the target markets are identified, Danaher Corporation will look for platform companies with an edge in a particular niche, sometimes market leaders that are underperforming financially and that can benefit from Danaher’s operational expertise. The fact that Danaher keeps screening potential markets also provides them with an edge once opportunities arise as market due diligence is already completed. Moreover, once Danaher enters a market, it will keep challenging the market on a continuous basis aiming for a full understanding of the customer population rather than only focusing on the existing customer base. Both the readiness to acquire in a certain market and the ability to fully test the business model of the acquired company has a significant impact on the time taken to fully integrate the acquisition under the DBS umbrella. Furthermore, Danaher Corporation only enters markets with a growth plan within that segment that will comprise further bolt-on acquisitions that make strategic sense together with the platform companies and where synergies are likely to be realized. Over the years, Danaher has developed extensive in-house M&A capabilities, which allows them to conduct successful acquisitions without giving in to external pressure from financial and legal advisors. This had kept the company under-the-radar and with limited coverage from equity analysts, hence also limited competition emerged throughout the years trying to copy its business model. While the excellence of hand-picked operating executives has been very effective at boosting the performance of each segment, also the capable top management has taken key decisions that allowed Danaher to navigate economic downturns, e.g. sound market understanding led the company to de-lever before the high yield crisis in the 90s. Management has also always had an important focus on HR policies and employee development, especially in newly acquired businesses. Top management was spending a considerable amount of time selecting the right people for key operational positions. Also, the Spartan approach to HR management kept a lean overhead across the corporate structure. 2. How far can the DBS travel? Is there a limit to the range of businesses in which Danaher can create value? Danaher Corporation based the DBS on Toyota’s Kaizen approach and it is very centered around manufacturing. So naturally, industries outside of manufacturing might experience limited benefits from DBS. This might hold especially true for financial and professional services. While the DBS in its principles encourages and pushes employees to improve the use of the manufacturing capabilities, supply chain efficiency, working capital usage, etc., these are all initiatives that deal with goods and their usage whereas in financial and professional service improvements come at the expense of the workforce a lot of the times due to automation of tasks that have been

carried out by humans before. This might lead to severe resistance from employees as they might fear losing their jobs. Hence, DBS would not really add value to those industries. Out of the DBS, the People part is probably extendable to nearly any kind of industry. The culture does not necessarily have to be a DBS culture but nearly any company has its own “culture” that it boasts and that it could or already does look for in people that it recruits or that are working for target companies. The Plan part of the DBS for example might look different when looking at PEs. Their plans are likely not including long-term value creation but rather identifying short-term turnaround or improvement potentials and aggressive measures to tackle them. Yet, planning is still part of the process of nearly any M&A process, and hence this part of the DBS is extendable to nearly any industry as well although in different forms. The Process part of the DBS is likely to be the least transferable to other industries. This comes as Danaher’s companies are very much centered around manufacturing which shares a lot of similarities and concepts across different products. In other industries, e.g. financial services, completely different skillsets, approaches and tools are used within different divisions (e.g. investment bankers and traders will have completely different backgrounds, skillsets, tools, and work approaches, and are likely to share limited overlaps). Hence, combined training of employees might actually destroy value as people have few common grounds to be taught on and hence will waste valuable time when specifics will be taught that are only relevant to one party. Moreover, introducing employees of newly acquired companies to the DBS culture might lead to serious conflicts as a lot of a company’s success might be due to the culture it previously had. This can be especially true for entrepreneurial companies and tech start-ups. Their employees live a different lifestyle at work and might be resisting to “convert” to the corporate culture of DBS. In general, tech start-ups, consultancies, and financial services oftentimes attract young talent because of their different culture when compared to large corporates. Hence, natural resistance might occur within those companies when having to deal with DBS leading to a loss of talent and hence value destruction. When it comes to the Performance part of the DBS, especially the PD, a lot of similar things are probably already in place in other industries and businesses. Hence, PD might prove to be an enhanced version of existing performance reviews and agendas. This could probably be easily extended across a wide range of businesses.

3. What are the biggest challenges facing Danaher in 2010? What can Larry Culp do to prepare the organization for these challenges? Despite its impressive track record, even throughout the financial crisis, Danaher has multiple challenges to meet in continuing its legacy of high growth and profitability. By 2010, Danaher has expanded significantly, reaching a size that by itself makes it difficult to sustain historic growth rates, whereas growth from a lower base was easier to achieve.

Organic growth always only accounted for a small portion of Danaher’s impressive growth story (5% vs. 18% total growth). Holding strong market positions in all markets it is active in combination with slowed global economic activity makes it even more difficult to sustain or increase these organic growth rates. Danaher’s main source of growth – acquisitions – is also heading towards more challenging times. To sustain growth rates Danaher has to either increase the pace of its acquisition or start acquiring bigger targets, both of which will make integration into Danaher and implementation of DBS more difficult. A large pool of managers that are familiar with DBS and available to help implement DBS in the newly acquired companies will be required for future expansions. This could create a bottleneck within the group and ultimately hurt Danaher’s future performance. Moreover, larger targets could be more difficult to integrate as they are more likely to have a strong organizational culture and traditions already in place. Bidding for larger targets Danaher will increasingly have to compete with PE firms, which are targeting similar firms and industries as Danaher. Given Danaher’s main focus on acquisitions that are complementary to its businesses and give rise to synergies, Danaher most likely will be able to outbid PE’s while still creating value for its shareholders. Nonetheless, there is a general trend toward higher valuation levels in the M&A market, making growth through acquisitions an increasingly expensive growth strategy. Furthermore, nowadays manufacturing companies and especially larger ones are more likely to have lean manufacturing techniques already in place, leaving less room for gains through operational improvements from implementing DBS. Within Danaher’s existing business portfolio, striving for continuous improvements has been an important performance driver. After several years of operational improvements, it is however questionable how much room for further improvements is left with these companies. The extension of DBS to areas such as innovation, R&D, marketing, and sales, where the program is less of a clear fit, might already be a first manifestation of the limits of continuous improvements being reached in other areas. Danaher faces all these challenges at a time when the market starts to take an increasing interest in Danaher due to its sizable market cap. Dealing with an increasing number of analysts covering the company drains resources from the headquarters, and puts more scrutiny on the companies operating and strategic decisions. While employing more open communication might invite competitors to copy and adapt similar practices, too discreet behavior might hurt the favorable stance that the market has taken on Danaher historically, as the company heads into a more difficult growth environment with a less clear path to operational improvements. Preparing Danaher for these challenges should be a top priority for Larry Culp going forward. Establishing well-organized communication channels with investors and analysts could be

the first important step to meet the market’s increased interest head-on, and could help find a balance between inviting emulation and satisfying investors’ need for information. As Danaher increasingly steps into the ‘natural habitat’ of PE’s when competing for targets, the group could embrace this change in the acquisition environment by hiring former PE executives, to help compete effectively for these targets. This could also tackle the issue of the internal Danaher talent pool potentially becoming a bottleneck within the company. Former PE employees could contribute to developing DBS further by bringing in new ideas and best practice examples from their PE experience, while Danaher could still continue to keep the edge it has over regular PE firms through synergies between its firms. 4. What are the differences and similarities between Danaher’s strategies and processes compared to the ones used by private equity funds? What, in your experience, prevents any company from putting in place a similar set of processes to drive operational performance? Compared to the typical holding period of roughly 5 years of private equity funds, Danaher intends to hold the companies indefinitely at the time of acquiring them. A potential exit is not part of the strategy of Danaher. When evaluating the success of acquisitions, Danaher uses ROIC as a measure, representing operating performance, whereas PEs use the IRR as their target measure to be maximized. Hence, Danaher focuses on operating performance when evaluating acquisitions by the numbers whereas PEs care about the financial return to their LPs. When acquiring companies, Danaher also does not use as high leverage levels as PEs do since financial synergies or financial engineering is less part of the strategy employed by Danaher shown by their leverage of only roughly 20%. Moreover, management is incentivized in a different way, as they will not buy in the equity of the company but rather get equity awards as part of their compensation. This makes sense as Danaher operates as a conglomerate where management of a portfolio company has less influence on the overall conglomerate’s value and the value of the portfolio company will be difficult to assess/liquidate. This could, on the other hand, also give rise to a free-rider problem that is potentially countered by monthly reviews. Moreover, the whole acquisition process is less dependent on external advisors and expertise, as they have their own in-house M&A department and carry out the market and industry analysis on their own, whereas PEs mainly use the help of investment banks and consultants for M&A processes. In order to realize operational improvements, Danaher applies its DBS rather than using the help of external consultants as PEs do. In general, acquisitions at Danaher are driven by their fit for platform companies and potential revenue and cost synergies whereas PE's initial investments usually come with no synergies to be realized. These bolt-on acquisitions are also usually driven by the operating companies themselves rather than by the Danaher Group Management which stands in contrast to PE owners and their heavy push towards and influence on acquisitions.

In the first few weeks after acquisitions, when Management usually works out and implements an extensive turnaround plan under PE ownership, the management of companies Danaher acquired is trained off-site with regards to the DBS. This is a particular difference when compared to PEs, in that Danaher applies a hefty focus on developing human capital in-house whereas PEs usually recruit proven industry experts rather than develop them. The management also rotates a lot around the portfolio companies of Danaher whereas for PEs this practice is not carried out thanks to the equity buy-in. But there are also some similarities between Danaher’s and PE’s strategies and processes. Both of them show high M&A activity and are targeting market leaders in stable, non-cyclical industries that are underperforming financially and offer room for improvements that stand at the core of value creation for them. Moreover, fragmented industries with a lot of add-on acquisitions are a common theme for both Danaher and PEs that both pursue the platform company model as part of their strategy. Measuring the performance of these acquisitions or investments, both Danaher and PEs set targets in the short term (3 years ROIC target for Danaher and 5 year IRR target for PEs). When evaluating the potential acquisition targets, the existing management team is equally important for the two parties, albeit Danaher is looking for different qualities than PEs do (e.g. fit for DBS ). Despite the off-site training at the beginning of the period after the acquisition, Danaher works out a plan for the first 100 days of the purchase which is a tool similarly used by PEs (e.g. EQT). There are also similarities in that they are focussing on core businesses and divesting any companies that are considered non-core. In our experience, it largely depends on the industry whether a similar set of processes can be implemented. Danaher is very much focused on manufacturing companies. In these companies, improvements are mainly targeted towards the most efficient use of production facilities, supply chain arrangements, and working capital management. In professional and financial services, improvements basically come in the form of automation and IT. This means that jobs won’t be carried out by humans anymore. Thus, there is little incentive for employees to come up with operational improvements as this would cannibalize their own jobs. Hence, such a set of processes would not really work in those industries. Moreover, manufacturing is a very standardized process that can be optimized fairly easily. In industries as M&A advisory or Management Consulting, the services are client-focused and client-specific which makes automation difficult and can only be limited to certain generic parts. This again faces the problem that this would mean that headcount could be reduced resulting in the problem that people dealing with the relevant tasks might have no incentive to contribute towards operational improvement and even resist given the fear of losing their job. In those industries, it will also be harder to measure tangible results when compared to

manufacturing (i.e. deadline handling and quality of produced books of junior analysts in investment banking). In those industries, senior executives will also be less likely to switch companies or divisions as their main assets are client relationships that cannot be as easily transferred (e.g. switching from advising industrial clients to financial clients) as for example knowledge of DBS and expertise in manufacturing practices. Operational improvements might also be limited by high switching costs in certain industries (e.g. software contracts) leading to limited improvement potential. Compared to the non-cyclical manufacturing businesses of Danaher, Investment Banking, for example, is highly volatile making a focus on operational performance and hence costs quite difficult as market activity may be dried up for a quarter. Any redundancies and improvements based on those conditions would prove fatal in the long- or even short-run as activity might pick up quickly requiring enough workforce to be able to effectively compete. Besides the general cost-cutting approach in banking, it is still very much focused on the revenue side of the business. Also, different forms of ownership might hinder any such plan to be implemented. Government-owned companies provide little incentives for employees or even managed to drive operational performance as their jobs are guaranteed by the state and there are no real incentive programs with regards to pay in place....