What Makes Modern Day Conglomerates Great!

During their latest episode of the VALUE: After Hours Podcast, Valdez, Taylor, and Carlisle discuss What Makes Modern Day Conglomerates Great!. Here’s an excerpt from the episode:

Tobias: What do you think distinguishes the Constellation, Danaher, Berkshire, Vista, like that modern day conglomerate or whatever it is? The conglomerate to 1960s that everybody was– for a while, that was super-hot in 1960s, and then after that they became– The whole point of the leverage buyout era was that they were buying those busted conglomerates, and rationalizing them, bringing them back down to their core components so they could focus rather than being distributed. Why do you think this has come back around that there’s this reconstruction of that old conglomerate idea?

Mark: It’s a great question. I don’t know if I have the best answer for it. My sense of it is from the original conglomerate days, they just got into so many unrelated businesses.

Tobias: That was the attraction. I know you were diversified. So, something was always working.

Mark: I guess so, yeah. But that, again, can lead to a very perverse decision-making process where you’re doing a bunch of different things that have no ROI, and ultimately aren’t to the benefit of shareholders. I think things got pretty fast and loose on that front.

Tobias: It became an EPS game. They figured out that you could buy a terrible business. But if you got it cheaply enough and it was accretive to EPS, and then you had enough gloss on top so it looked like you were doing– You had the Vista Business Systems or whatever it was that you– [crosstalk]

Jake: You issued shares at, call it, 30 times earnings to acquire a company that was selling for five times earnings, and you just kept doing that over and over again.

Mark: Yeah.

Tobias: How do you distinguish the ones who are doing that versus something else?

Mark: I think it tends to be really related to the business strategy.

Tobias: Tracking return.

Mark: Do they have a playbook, and is there a real platform component to what they do? I think Constellation, TransDigm, Danaher are all great examples of that. I’m sure I’m missing a few others. Roper is one that comes up a lot. I think you can even look at a business like Danaher, where it’s transitioned significantly from what it was in the early 1980s when the Rales brothers first started the business, and they were acquiring small manufacturing companies. Right now, it’s a massive life sciences tools business. It’s completely different. I’ve heard Mitchell say that, every 10 years or so, they had to reinvent themselves. And so, a lot of that comes down, I think, to the management team, their incentive structure, their motivation. Are they going to do the right thing for shareholders or are you going to play some sort of EPS game which might be fun for a bit, but ultimately comes home to roost in a way that’s– [crosstalk]

Jake: Yeah, you become GE.

Mark: Exactly. Yeah. I just think there’s few folks that have that mentality. I think one of the things that is a good thing and a bad thing right now is that the holding company model has started to become a little bit more popular. I think my list is something like 30 that have gotten started within the last three to five years. I think it’s great, because I think done well should be the right incentive model for management and investors in creating that alignment. But if done wrong, then I think it’s going to set it back.

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