Lawrence Cunningham: Shareholder Activists

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By Lawrence Cunningham

Lawrence Cunningham is the author of the new book, Berkshire Beyond Buffett, and editor of the classic, Essays of Warren Buffett. On Wednesday in Chicago, he and Marmon Group CEO Frank Ptak will discuss “Berkshire Beyond Buffett” in a free public discussion at Northwestern (register here).

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Shareholder activists are pursuing large corporations, questioning those with multiple revenue streams and pejoratively labeling anything resembling a conglomerate a historical anachronism. In the world the activists envision, Jay and Robert Pritzker would not have been allowed to build the Marmon Group nor could Warren Buffett and Charlie Munger have created Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). That would be a huge loss for corporate America.

Activists such as Carl Icahn oppose corporate diversity because they say it is too hard for them to understand a complex business. Nelson Peltz is hectoring E I Du Pont De Nemours And Co (NYSE:DD)’s managers to split the chemical maker up because he says it is easier to grow a small company than a large one. Both urge handing cash over to stockholders in the process, rather than reinvest it in the business.


True, for some organizations size can be a drag. Bloat can prevent acting quickly and it is harder to move the needle at a massive company. But the splitters overlook how tremendous long-term value resides in corporate cultures that are built through steady, gradual, growth over long periods of time.

These values are striking in the case of Marmon and Berkshire, corporate behemoths with scores of subsidiaries engaged in hundreds of different lines of business.  Both were built on the same principles, which endure to this day, and which differ from the values many shareholder activists represent.

For one, neither company believes in strategic plans, while activists portray these as indispensable. As a senior executive of Marmon put it in a description that applies equally to his company as to Berkshire: “We’re not planners, we’re opportunists.” Acquisition criteria are general, broadly adding good companies at fair prices. 

Both companies generate multiple earnings streams adding up to oceans of cash flow. The commanding resources give subsidiaries access to cheap and plentiful capital that stand-alone rivals cannot match. Historically, Marmon and Berkshire regularly, if not always, outperformed the S&P 500.

Both conglomerates cultivated reputations as a buyer of choice. Entrepreneurs and families selling their businesses prize the value-based cultures instilled in these firms. The conglomerates often obtain such businesses at a steep discount from intrinsic business value.

Finally Marmon and Berkshire were each founded and developed by powerful leaders who left indelible marks. All four of them—the Pritzkers, Buffett, and Munger—possessed similar personal qualities relevant to such leadership, notably self-knowledge, vision, and patience

For example, Robert Pritzker knew manufacturing and did not venture far from it; Jay excelled at deal making, finance, law, and tax—and left operations to Robert; Buffett and Munger say operations and technology are not within their circle of competence and shy away from them. The Pritzkers viewed potential deals from multiple angles simultaneously; Buffett and Munger view them against multiple alternative opportunities.

Each of these conglomerate builders prized long-term values, while being swift and agile in decision making, especially about acquisitions. Each deployed these skills in the early years with the mission of creating a company; they used these skills in their later years with a view to sustaining it.

But shareholder activists prefer busting up to building up. While Marmon and Berkshire are truly sprawling institutions, the activists target the relatively simple and integrated likes of DuPont, eBay Inc (NASDAQ:EBAY), Gannett Co., Inc. (NYSE:GCI), and PepsiCo, Inc. (NYSE:PEP). They may be right about the virtues of simplicity and smallness, but should pay more attention to the ongoing value creation at true conglomerates including Danaher Corporation (NYSE:DHR), General Electric Company (NYSE:GE), and United Technologies Corporation (NYSE:UTX).  These institutions offer sustained long-term value not short-term payouts.

The only thing really anachronistic about Berkshire and Marmon are their names, “Berkshire Hathaway” being a long-defunct textile company with nineteenth century bloodlines and “Marmon” a long-defunct automaker that made the winning car in the first Indianapolis 500 auto race in 1911. Otherwise agile and prosperous, companies like these are valiant and venerable parts of the corporate landscape and should be allowed to flourish.


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