This weekly email provides an update on all research published last week, along with a few insights from what we learned.

Published Last Week

Upcoming Work

Find out more about upcoming IP Research here. Over the next few months, we plan to publish research on:

  • CCC Intelligent Solutions
  • Precision Castparts vs Howmet
  • US Specialty Insurance
  • Constellation Software deal origination moat
  • Fever Tree / Molson Coors partnership
  • Carvana subprime loan origination, and more

The Danaher Business System

As Danaher has shifted to a full life sciences company, implementing DBS is increasingly important to drive outperformance. In its early days, Danaher acquired industrial companies for ~8-12x EBITDA with operational improvements reducing the price to ~5-6x pro-forma EBITDA. 

Over the last decade, Danaher’s M&A strategy has evolved. Its recent acquisitions include Abcam ($5.7bn at ~30x LTM EBITDA), Aldevron ($9.6bn at ~64x NTM EBITDA), Pall ($13.8bn at 18x NTM EBITDA), GE Healthcare ($21.4bn at 18x NTM EBITDA, and IDT ($2.1bn at ~50x NTM EBITDA). 

Unlike Constellation Software or Lifco, Danaher benefits less from multiple arbitrage. When paying up for assets, post-acquisition EBITDA growth becomes even more important. Danaher has also evolved to integrate assets to drive ‘synergies’, such as recently merging Pall and GEs downstream bioprocessing teams. Danaher has also become more of a bet on the long-term life sciences organic growth and the company's underlying technology. With more onus on post-acquisition operational improvements, the DBS is increasingly critical for DHR to outperform.

DBS is the company’s operating system. It’s the fabric that holds the organisation together. It’s a core set of principles that underpin employee behaviour across all functions; sales, R&D, manufacturing, and even leadership. 

We’ve spent the last five years studying the various ways Danaher deploys its business system across the organisation. This research roundup curates some of our work on the topic, explains why we’ve covered certain angles, and shares a few insights from each interview:

  1. Danaher: DBS Office Structure & Policy Deployment: how the DBS office is structured to deploy DBS tools in Danaher operating companies 
  2. Danaher: DBS Office Operational Strategy: how the DBS deploys policies around the org, incentives for subsidiaries to listen and deploy DBS policies, and barriers deploying such a strategy in other companies  
  3. Danaher Business System: Batch to One Piece Flow Manufacturing: how DHR changes a manufacturing process from batch to one-piece flow post-acquisition 
  4. Danaher Business System: Kaizen Case Study at Pall: a case study of how Danaher runs a kaizen event at Pall
  5. Danaher Business System: PSP, Kaizen, & Six Sigma: we walk through how DHR deploys various tools include PSP, different kaizen events, and six sigma vs lean tools
  6. Danaher: Implementing DBS in the Sales Process: how Danaher deploys DBS policies to drive revenue, retention, and improve gross margin 
  7. Danaher Business System: Hach Sales Team Case Study: how Hach deployed daily management, action planning, and cascading targets in sales to drive growth 
  8. The Danaher Business System Mindset: how and why the DBS fosters a unique culture that is hard to replicate elsewhere
  9. Danaher, Beckman Coulter, & The DBS Machine: how Danaher deployed DBS at Beckman Coulter post-acquisition 
  10. Danaher's Culture, Pall Industrial, & Deploying DBS: why PSP tool is so important and how Pentair and Crane's ‘DBS-light’ system compares to Danaher.

Amazon B2B Distribution: Healthcare Product Distribution

This interview is the first in a series to better understand Amazon's B2B distribution business across healthcare and industrial end markets. This interview with an executive who led the Amazon Healthcare Distribution go-to-market strategy explores the complexity of distributing healthcare products across the US:

There were many inefficiencies, like how products are priced. For example, a box of gloves has a price generally not controlled by the manufacturer but by the distributor. The distributor has price control, which is unique. The cost to distribute a product within the supply chain is variable based on price, not dimensions, weight, or distance. That puzzled me. Large entities called group purchasing organizations (GPOs) are paid millions to negotiate supply contracts that can be achieved directly between a provider and a manufacturer without a middleman. - Former Leader at Amazon Business, Healthcare B2B Distribution

This complexity led Amazon to focus on non-acute, standard products by cutting out GPOs:

Amazon's approach was different; they believed they didn't need GPOs. They wanted to negotiate directly with customers and bring products transparently, rather than negotiating and paying fees with multiple pricing tiers based on size, scale, or commitment. We focused on building our business at the non-acute level—clinics, physicians, and nursing care—who appreciated us because primary distributors generally ignore that segment. - Former Leader at Amazon Business, Healthcare B2B Distribution

However, the big question is whether AMZN can move upmarket to acute and medical device spend which is more controlled by distributors via GPOs?

This interview explores how Amazon has won share in healthcare product distribution vs Cardinal and McKesson, how it plans to win acute and clinical spend, and the contract complexities at each tier of healthcare product distribution.

Buy-Here-Pay-Here Subprime Auto Dealers: Underwriting & Servicing Loans

Over 18 months ago, we released a survey of 11 subprime auto dealers to understand better how and why they choose certain lenders and the potential impact on Credit Acceptance's loan volume growth.

While relatively low advance rates appeared to be the main barrier for dealers to originate via Credit Acceptance, our most recent interview with a former Buy-Here-Pay-Here car dealer shares how dealers using CAPS, Credit Acceptance's loan processing platform, can use it to game the system. By running subprime loan applications through CAPS, dealers can see how much CACC is willing to advance them to service each loan. CACC has decades of accumulated proprietary loan performance data that is fed into a continually-improved scorecard used to predict loan returns. With such info at hand, dealers are using CACC's know-how to get a sense of the quality of the loans being structured. This, in turn, enables them to keep the high-quality loans on their books, while sending through the lower-quality ones to CACC, leading to lower overall volume combined with adverse selection.

They're using Westlake's and CACC's algorithms to determine which deals to buy. If they need extra cash because things are expensive, they run a customer through CACC. If CACC dislikes the deal, there's a $2,500 bank fee, but selling it to CACC can make $1,500 today. If CACC likes the customer, there's a $900 bank fee, and they can make $2,500 today. The dealer decides which loan to sell to CACC and which to keep. The first one they give away to make $1,500 because CACC thinks it's unlikely to collect. If CACC likes a loan, the dealer keeps it to avoid giving up the discount. A hybrid dealer can use Westlake's and CACC's algorithms against them, sending them marginal paper and keeping the good stuff. If Westlake or CACC wants the deal, the dealer keeps it. If neither likes the deal, they take the fast money to maintain cash flow and manage interest expenses.- Former Buy-Here-Pay-Here Car Dealer