Felipe: Good analysis. That having been said, it is interesting to note that 90+% of the Thomson family wealth was tied up in Thomson Corp when it made the decision to de-diversify from four very diverse businesses - newspapers, textbooks, European travel and North Sea oil - to one business - online must have info for professionals. I would argue that it reduced their risk - in fact that was my pitch. Newspapers were heading into the tank. Textbooks were never going to get better. European travel was OK but had way more downside than upside. And North Sea oil was a depleting asset. It has turned out spectacularly for the family. Maybe, someday it will be a problem. But in the meantime, they have used the dividends to build up the wealth of all the family members held outside Thomson. So maybe the lesson is a combo. Focus on a business in which you can achieve competitive advantage. And take out unnecessary capital for each family member to invest how they wish - typically in financial investments not whole companies.
The same would hold for the Kristiansen family of Lego. One incredibly narrow business. Not toys, but construction toys. But Kirbi, the family holding company has probably $10-15B of assets outside Lego now. Best, Roger
Ahhh yeah, that's critical, I've seen it in some of my family-owned business clients too! The maintenance of some lines of businesses for sentimental reasons ("that's where grandpa started") instead of a clear concentration *or* diversification mandate... You're right, that's a foundational part of the work - get out of bad businesses to free up resources you can invest in good ones. And I really like the way you approached it, transfer the responsibility for diversification / avoiding risk-of-ruin to the shareholders, by explicitly making the company more strategic. Thanks Roger!
Glad you liked it. And I think we are in total agreement on everything. The really high quality PEs have figured this out and are making fortunes fixing businesses that have been given up on.
Roger, great article as usual! Here's something I've been thinking about on concentration vs. diversification:
Your article's core move depends on something left unsaid. Shareholders have already solved their own diversification problem at the portfolio level. Pension funds, endowments, index trackers. The company's cyclicality is noise in their holdings. They've already bought ruin insurance across hundreds of positions. For them, strategy-driven concentrated edge is exactly what they want.
This is why your advice lands. Concentrate ruthlessly. Let shareholders handle diversification themselves. The Thomson Reuters transformation you participated in is the model. Surgical divestiture to true believers. Redeployment where you can build genuine capability. The "love it or let it go" heuristic works because the shareholder base has already diversified away company-specific ruin risk.
...
But what happens when the controlling shareholder hasn't diversified? The family business where the third generation has 90% of their net wealth in the enterprise. The founder-led company where personal ruin and company ruin are the same event.
Here, the function being optimized changes. The question isn't "will shareholders give us a higher multiple?" The question becomes, given that our dominant owner faces concentrated ruin risk, does enterprise-level diversification into low-correlation businesses with genuine edge reduce path-dependent catastrophe while deploying capital above hurdle rates?
Ole Peters has done fascinating work on this exact problem. What happens on average across many parallel companies is fundamentally different from what happens to one company over time. For processes where outcomes compound sequentially, optimizing expected returns can lead to certain ruin.
Which is why concentrated-owner is different. It's not about fooling shareholders. It's about recognizing that which shareholder's utility function you're optimizing determines whether concentration or diversification maximizes survival-weighted returns through time.
Of course, the AT&T and Time Warner deal failed every test. No edge in content. No ruin being mitigated. Correlation was actually required for the synergy thesis to work. Empire-building dressed as transformation. Your prediction of catastrophe was correct because the logic was broken at the root.
In the end, I think the important advice for CEOs is: know your owners.
Diversified institutional base? Concentrate. Let them handle ruin avoidance.
Concentrated owner-operator? The math of survival legitimately enters the strategy conversation. Though only into businesses where you can achieve genuine edge with genuinely low correlation.
Brilliant article, and very true about the real motives of strategy consultants, investment bankers, and M&A lawyers who make their living from the volume and value of these deals. Fundamentally, buyers must understand what they're purchasing in the first place - for instance, the cyclical nature of a business or industry doesn't appear overnight. If an acquirer lacks a clear plan for improving the profit margin of a target business (such as through a change in business model) or identifying new opportunities for accelerated growth, they're better off walking away - especially if current performance levels don't meet shareholder expectations.
Interesting article. Recently I did a technical assessment of an aerospace company that operates in a very niche market. Possibly trying to diversify their revenue sources, they had bought a handful of small companies in different niches. The investment maybe will payoff in the long term, but they suffocated their cash flow, and were kind of desperate to find an investor to inject some money in the system. As you said, they couldn't help the small businesses they acquired, but were expecting them to help the buyer.
Always such eloquent and unambiguous writing Roger. Thank you. The point about ensuring the acquirer can effectively optimize the assets of the acquired rather than vice versa is so brilliant. I've personal experience where the acquired company was seen as a silver bullet or magic answer to the woes of the acquirer. A waste of time and effort. To torture the host & virus metaphor, the host killed the virus - often because of culture incompatibility - and no magical turnaround ensured.
Felipe: Good analysis. That having been said, it is interesting to note that 90+% of the Thomson family wealth was tied up in Thomson Corp when it made the decision to de-diversify from four very diverse businesses - newspapers, textbooks, European travel and North Sea oil - to one business - online must have info for professionals. I would argue that it reduced their risk - in fact that was my pitch. Newspapers were heading into the tank. Textbooks were never going to get better. European travel was OK but had way more downside than upside. And North Sea oil was a depleting asset. It has turned out spectacularly for the family. Maybe, someday it will be a problem. But in the meantime, they have used the dividends to build up the wealth of all the family members held outside Thomson. So maybe the lesson is a combo. Focus on a business in which you can achieve competitive advantage. And take out unnecessary capital for each family member to invest how they wish - typically in financial investments not whole companies.
The same would hold for the Kristiansen family of Lego. One incredibly narrow business. Not toys, but construction toys. But Kirbi, the family holding company has probably $10-15B of assets outside Lego now. Best, Roger
Ahhh yeah, that's critical, I've seen it in some of my family-owned business clients too! The maintenance of some lines of businesses for sentimental reasons ("that's where grandpa started") instead of a clear concentration *or* diversification mandate... You're right, that's a foundational part of the work - get out of bad businesses to free up resources you can invest in good ones. And I really like the way you approached it, transfer the responsibility for diversification / avoiding risk-of-ruin to the shareholders, by explicitly making the company more strategic. Thanks Roger!
Glad you liked it. And I think we are in total agreement on everything. The really high quality PEs have figured this out and are making fortunes fixing businesses that have been given up on.
Roger, great article as usual! Here's something I've been thinking about on concentration vs. diversification:
Your article's core move depends on something left unsaid. Shareholders have already solved their own diversification problem at the portfolio level. Pension funds, endowments, index trackers. The company's cyclicality is noise in their holdings. They've already bought ruin insurance across hundreds of positions. For them, strategy-driven concentrated edge is exactly what they want.
This is why your advice lands. Concentrate ruthlessly. Let shareholders handle diversification themselves. The Thomson Reuters transformation you participated in is the model. Surgical divestiture to true believers. Redeployment where you can build genuine capability. The "love it or let it go" heuristic works because the shareholder base has already diversified away company-specific ruin risk.
...
But what happens when the controlling shareholder hasn't diversified? The family business where the third generation has 90% of their net wealth in the enterprise. The founder-led company where personal ruin and company ruin are the same event.
Here, the function being optimized changes. The question isn't "will shareholders give us a higher multiple?" The question becomes, given that our dominant owner faces concentrated ruin risk, does enterprise-level diversification into low-correlation businesses with genuine edge reduce path-dependent catastrophe while deploying capital above hurdle rates?
Ole Peters has done fascinating work on this exact problem. What happens on average across many parallel companies is fundamentally different from what happens to one company over time. For processes where outcomes compound sequentially, optimizing expected returns can lead to certain ruin.
Which is why concentrated-owner is different. It's not about fooling shareholders. It's about recognizing that which shareholder's utility function you're optimizing determines whether concentration or diversification maximizes survival-weighted returns through time.
Of course, the AT&T and Time Warner deal failed every test. No edge in content. No ruin being mitigated. Correlation was actually required for the synergy thesis to work. Empire-building dressed as transformation. Your prediction of catastrophe was correct because the logic was broken at the root.
In the end, I think the important advice for CEOs is: know your owners.
Diversified institutional base? Concentrate. Let them handle ruin avoidance.
Concentrated owner-operator? The math of survival legitimately enters the strategy conversation. Though only into businesses where you can achieve genuine edge with genuinely low correlation.
Brilliant article, and very true about the real motives of strategy consultants, investment bankers, and M&A lawyers who make their living from the volume and value of these deals. Fundamentally, buyers must understand what they're purchasing in the first place - for instance, the cyclical nature of a business or industry doesn't appear overnight. If an acquirer lacks a clear plan for improving the profit margin of a target business (such as through a change in business model) or identifying new opportunities for accelerated growth, they're better off walking away - especially if current performance levels don't meet shareholder expectations.
Interesting article. Recently I did a technical assessment of an aerospace company that operates in a very niche market. Possibly trying to diversify their revenue sources, they had bought a handful of small companies in different niches. The investment maybe will payoff in the long term, but they suffocated their cash flow, and were kind of desperate to find an investor to inject some money in the system. As you said, they couldn't help the small businesses they acquired, but were expecting them to help the buyer.
Always such eloquent and unambiguous writing Roger. Thank you. The point about ensuring the acquirer can effectively optimize the assets of the acquired rather than vice versa is so brilliant. I've personal experience where the acquired company was seen as a silver bullet or magic answer to the woes of the acquirer. A waste of time and effort. To torture the host & virus metaphor, the host killed the virus - often because of culture incompatibility - and no magical turnaround ensured.