Danaher (DHR) is an extraordinarily well-run instrumentation and tool business. Its stock has outrun Berkshire Hathaway's (BRK), while operating on similar principles. Just as Warren Buffett seeks to acquire companies in order to grow, so does the management of DHR. Year by year, very little growth is organic. Instead, the vast majority is acquisition-driven.
So what makes this method work? To make acquisitions work accretively (meaning adding to earnings) over time, one must either have access to cheap capital - such as low interest rates or high priced stock issuance - or be a better owner. BRK has long trumpeted the fact that its management cannot add value - they simply purchase home run hitters and let them hit home runs. DHR, on the other hand, has a rigorous business system to which all acquisitions are held.
The proof is in the pudding. DHR has successfully made acquisitions pay for themselves when made on a cash basis - a rarity. By focusing the business and cutting excessive expenses, DHR is able to make the increased profitability repay the use of cash. The Danaher Business System creates about a 16% "free" cash flow margin. These excellent margins provide the funds fueling future acquisitions. I put the word free in quotations because interest and taxes must be paid.
Closer scrutiny shows that DHR's "free" cash has been getting freer. While the markets have accorded consistent and high multiples on earnings and book value to the stock for at least 15 years, the multiple paid on revenues has been increasing. When I sought to understand the reason, DHR has moved from 40% tax rates to lower than 25% rates currently - something to be careful about.
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