Berkshire notably does not have a 'conglomerate discount', nor does it or its companies warrant
one. It arguable has a 'key man' discount, though.
One of the fascinating things is that Buffett never takes the highest position on the valuation scale, and he actively works the scale.
Let me explain. The same operating company can have several 'valuations'. At the low end it is a company operating as private, closely held enterprise. The same company, but perhaps thinly traded public, is usually valued higher; readily traded on a major exchange usually carries a higher valuation still. That same company would be valued even higher on the 'value scale' if it were potentially a strategic target for someone.
A conglomerate, say, purchasing that target company, and squeezing synergistic costs (or opportunities) out of it would assign the highest value to that business. Often they'll pay up for that prospect. Looking at that target company, thius priced, we'd assign a 'conglomerate discount' if we were estimating its independent value to anyone else -- other than the GE or JNJ or whoever. There's usually no buyer further up the value chain for them to sell to. They've already squeezed out either the central-management type costs, various synergistic costs (sales, distribution, whatnot), or opportunities. There's often nowhere else to go for economic opportunity with that business.
Remarkably, over the years Buffett has been a master at working that value scale. He'll often buy the target company at the low end (private, closely held) or some similar proximity in the public market. Rather than "GE it", he keeps it fully standalone. The remarkable thing is that, despite his 'buy and hold forever' intention, he always has a potential buyer further up the food chain. Someone who really will pay up for the strategic or synergistic value. When 'forever' comes, and he does sell (Gillette, CapCities/ABC) there's a strategic or synergistic buyer on the level above him - a P&G or a Disney - willing to pay up from the value realizable under Berkshire.
Many of Berkshire's companies come to mind. (FlightSafety's potential value, perhaps, to a Boeing or aircraft consortium).
So anyway, no conglomerate discount has ever applied. The market seems to really lay on the key man discount, however. Now that's another story. For those who suggested the 'special sauce' added value a few days ago, perhaps the flip side of that discussion is the key man issue.
one. It arguable has a 'key man' discount, though.
One of the fascinating things is that Buffett never takes the highest position on the valuation scale, and he actively works the scale.
Let me explain. The same operating company can have several 'valuations'. At the low end it is a company operating as private, closely held enterprise. The same company, but perhaps thinly traded public, is usually valued higher; readily traded on a major exchange usually carries a higher valuation still. That same company would be valued even higher on the 'value scale' if it were potentially a strategic target for someone.
A conglomerate, say, purchasing that target company, and squeezing synergistic costs (or opportunities) out of it would assign the highest value to that business. Often they'll pay up for that prospect. Looking at that target company, thius priced, we'd assign a 'conglomerate discount' if we were estimating its independent value to anyone else -- other than the GE or JNJ or whoever. There's usually no buyer further up the value chain for them to sell to. They've already squeezed out either the central-management type costs, various synergistic costs (sales, distribution, whatnot), or opportunities. There's often nowhere else to go for economic opportunity with that business.
Remarkably, over the years Buffett has been a master at working that value scale. He'll often buy the target company at the low end (private, closely held) or some similar proximity in the public market. Rather than "GE it", he keeps it fully standalone. The remarkable thing is that, despite his 'buy and hold forever' intention, he always has a potential buyer further up the food chain. Someone who really will pay up for the strategic or synergistic value. When 'forever' comes, and he does sell (Gillette, CapCities/ABC) there's a strategic or synergistic buyer on the level above him - a P&G or a Disney - willing to pay up from the value realizable under Berkshire.
Many of Berkshire's companies come to mind. (FlightSafety's potential value, perhaps, to a Boeing or aircraft consortium).
So anyway, no conglomerate discount has ever applied. The market seems to really lay on the key man discount, however. Now that's another story. For those who suggested the 'special sauce' added value a few days ago, perhaps the flip side of that discussion is the key man issue.
