Never Underestimate a Good Acquisition

To most, it looked like the end of an era...

To the Rales brothers, it looked like the perfect time to buy.

Steven and Mitchell Rales were raised in the suburbs of Washington, D.C. They came from a family that knew real estate – not tools or factories.

But in 1983, the U.S. industrial sector was in decline. Factories were closing, and the manufacturing heartland was hemorrhaging jobs.

That's part of why the two decided to change their investment company's name from Diversified Mortgage Investors to the broader Danaher (DHR) in 1985. It was named after a creek in Montana... where the brothers had some good luck fishing back in the day.

It was fitting – in a way, they were going fishing again.

Danaher set out to buy the mismanaged industrial companies no one wanted to touch. That was how it eventually grew a string of underperforming toolmakers into one of the largest conglomerates on Earth...

And along the way, it was about to conquer one of the best brands of the decade.

The seeds were planted in 1986, when Danaher bought a struggling business called Chicago Pneumatic Tool...

In reality, it was three companies in one. Chicago Pneumatic itself made air compressors. But it owned another business called Jacobs Manufacturing, which made brakes for trucks... And Jacobs in turn owned a toolmaker named Matco Tools.

The problem was, when Chicago Pneumatic had acquired those businesses, it had failed to integrate them so they could cut costs.

Once the brothers got control of it, they made it their mission to cut waste within the businesses... including selling Chicago Pneumatic itself while keeping Jacobs and Matco. The brothers saw more potential in the smaller toolmaking side of the business.

Just before, the Rales brothers had their sights set on another company called Easco Hand Tools.

Easco had also fallen on hard times. It had a solid aluminum business, but its hand-tools business was losing money... even though it had one of the most valuable contracts in manufacturing at the time.

You see, Easco was the exclusive manufacturer of tools for the Sears Craftsman brand.

During the 1980s, Craftsman was a symbol of American quality. The tools were known for their durability, reliability, and a lifetime guarantee that no competitor could beat.

But Sears needed dependable suppliers that could meet its high standards, deliver on time, and produce at scale.

The Rales brothers saw their chance... and pounced.

By acquiring Matco and Easco, they had not only secured solid manufacturers... but they had also gained the ability to produce at the quality Sears demanded.

Danaher invested heavily in new machinery and modernized the production lines at Matco and Jacobs. It brought in fresh talent, trained workers to embrace a philosophy of continuous improvement, and tightened quality control to match Sears' stringent standards.

The Rales brothers weren't just aiming to supply Sears – they wanted to become indispensable.

Their careful strategy paid off...

Sears' Craftsman line, stocked with Danaher-made tools, filled store shelves across the country. The company nearly tripled its revenue between 1988 and 1995.

Having a good product and an invaluable sales pipeline is a great combination...

And that's how Danaher managed to turn its lagging manufacturers into a force to be reckoned with.

Now, we're not suggesting you go out and buy Danaher. This company has already seen its hypergrowth days.

But there are plenty of Danaher-like businesses on the verge of explosive growth. Look for smart acquirers with lots of room to keep growing through small acquisitions.

By following Danaher's road map to success, these companies could yield unprecedented gains.

Regards,

Joel Litman
November 8, 2024