The conglomerate model has of course been out of fashion on Wall Street and discredited by academics for years. It has been out of fashion on Wall Street because once it was terribly in fashion. During the late 1960’s and early 1970’s conglomerates and ‘one-decision’ stocks defined the Nifty Fifty era. These firms had astronomic valuations which equaled or exceeded those seen during the dot-com boom of 1997-2000 or even today’s private billion dollar unicorns. Every time valuations get to those soaring, unrealistic levels, like Icarus they will inevitably come down. The Nifty Fifty era ended in 1973-1974, the time of the first oil crisis. As stock market indexes fell by 45% or more, conglomerates like LTV, ITT, Textron, Teledyne and Gulf+Western, which had once dominated the market, quickly became discredited
Academics then came up with a lot of reasons why conglomerates were never good for investors in the first place. They boil down to three main arguments: transaction costs, agency costs, and a lack of transparency.
It is easier and cheaper, this argument holds, for an investor to buy stock in a few publicly traded firms than it is for one company to buy whole firms. If you wanted to buy firms involved in concrete, airlines and vacation time shares, all you would have to do is call your broker or go online. For $14.99 per trade, you could buy shares in three firms in a minute or less. If, by contrast, a company wanted to buy three firms in those same industries, it would have to find them, persuade them to sell (perhaps at a premium price), and then employ lawyers, brokers and valuation experts to help close the transactions. The transactions would take months, and the legal and other fees could and easily come to 5% or more of the costs of the companies themselves.
These are the expenses born by a firm for operating on your behalf. A shareholder-friendly firm makes sure that they are minimal. A non-shareholder- (owner) friendly firm will have large central staffs and overhead, build extravagant headquarters, and treat your money as their own. Since conglomerates by definition have many subsidiaries, the opportunity and ability to hide extra costs as a part of normal operating expenses can present themselves much more easily than they would in a business only operating in one industry.
The Annual Report is our chance to tell you how we did in the latest fiscal year. We hope we are making it easy for you to understand the businesses we are in, how they did and what we would like to do with Concierge in the future. If, after reading this Annual Report, you have more questions than you began with or find yourself scratching your head about how we try to make money, then we are not making your life easy, clear or transparent. Any company can purposely muddy things up or try and paint a pretty picture different from actuality. Conglomerates can do so more easily than businesses only operating in one industry for a couple of reasons. One is that conglomerates by their very nature tend toward a certain degree of complexity. The other concerns professional analysts. Usually organized along industry lines, Wall Street analysts find conglomerates harder to understand. For both these reasons, the argument holds, the market tends to value conglomerates cautiously, which in turn tends to hold down their share prices.
High transaction costs combined with high agency costs and potentially lower valuations due to transparency issues—all these can create what is called the conglomerate discount. It is the lower price difference one conglomerate would have versus if the same conglomerate was broken up into its component parts with each part trading independently in the market.
With all these horrible historical memories and reasons why conglomerates are no good, why would any investor in his right mind buy stock in a conglomerate at all? And the answer, for the most part, is they do not and should not. Despite all this, we are still convinced that Concierge should indeed be a conglomerate. Why? For two reasons: capital allocation and the owners’ perspective.
A company in only one single business has few choices regarding the placement of its profits. It can reinvest the profits back into the business, buy back shares or pay them out as dividends. As a conglomerate, Concierge, on the other hand, can do more. We can reinvest profits back into the business that generated the profits or into another subsidiary that may make better use of the profits. We can also invest the profits into other public or private firms as well as buy back shares or pay them out as a dividend. A conglomerate, in short, has more options when it comes to capital allocation. Now, whether or not those allocations bear fruit depends on the skill of management. That only time will tell.
The owners’ perspective.
We have talked about how conglomerates don’t make a lot of sense from an investors’ perspective, but from the owners’ perspective they do. An “owner,” in this case, would be an individual or small group of people who own and run their own privately held firm. At some point and for many reasons (mostly health, retirement or succession issues) they will need a change in ownership. When they do, they can close the business or sell it. Selling a firm can be done in a few ways, such as selling to employees through an ESOP, selling it to the next generation (assuming they want or can afford it), selling to a competitor, selling to a private equity group, or selling it to the public. None of these choices may be optimum. None may allow the original owners to continue running the firm they created while protecting the firm's corporate culture. But there is one kind of sale that would enable the original owners to do just that: selling to a public conglomerate such as Concierge.
Combine these two compelling factors, capital allocation and the owner’s perspective, with our new goal of making money instead of products, and you have, again, a unique opportunity for Concierge.
Once we took this new direction, our first step was simple. We asked if we were even in the right business to begin with. As I mentioned above, when Scott and I came on board, Concierge was in essence a conglomerate with one subsidiary- Janus Cam. The primary business of Janus Cam was importing and selling digital cameras to taxi companies. The cameras point forward and rear and record any accidents or altercations. Were unfortunate incidents to take place, the cameras would enable police and insurers to identify the party at fault, reducing liability costs. Clearly, there is demand by firms to spend $500 on cameras to save $5,000 or more on disputes. Continue…….