Tuesday, 5 January 2010

In praise of the long term view

There are some companies famously long term in their outlook. Warren Buffet’s Berkshire Hathaway is a famous example. Another company in the same league is Nestle.

Nestle , as everyone knows, is a food company. However, the way they dealt with two pieces of their portfolio that has nothing to do with food, is very demonstrative of their long term approach.

One is Alcon, an eyecare business. In 1977, Nestle acquired Alcon as part of a diversification outside their traditional food business. They bought this at that time of $280 m. Run professionally for two decades and more. In 2002, they decided to start selling it off ; so they floated 23% of the company for $33 per share. They were subject to wild criticism from the pundits for not selling off the whole company. To their credit, they didn’t listen to all the noise. Then in 2008 they sold another 25% of the stake to Novartis for $143 a share. Yesterday, Novartis bought out the balance stake for $181 per share. So bought in 1977 for $280m and sold in the noughties for $ 40bn. Not bad.

But more demonstrative of their long term approach is the second piece in their portfolio, L’Oreal. In 1974 Nestle acquired 49% of Gesparal, the French company that held the majority of the shares in L’Oreal with the Bettencourt family holding the majority 51%. This structure has now changed to direct shareholding in L’Oreal (about 30% each, with the rest publicly traded). But in an agreement with the Bettencourt family, Nestle agreed not to raise its shareholding during the lifetime of Liliane Bettencourt, the matriarch of the family. This they have honoured for the last 35 years and continue to do so. They have let L’Oreal be run professionally which has led to it becoming the global giant that it is now. There has been noise from the smart alecs for a long time for Nestle to either bid for the whole company or divest its stake. Nestle has done neither and have been patient. The value of their investment has of course grown dramatically with the growth of L’Oreal, but they have not heeded the noise from the Wall Street types and have resisted the temptation to do something silly.

One cannot but admire such long term perspective. Such a perspective seems to transcend generations - during this period Nestle had, at least, two titans leading it - Helmut Maucher and Peter Brabeck. It seems to run in the blood.

As an aside , I never thought I would pen anything praising Nestle, given that I worked for a competitor of it for a long time. But then, praise must be given where its due, isn’t it ?

19 comments:

  1. !!! i never knew i wud read a business bit so engrossed!! :) jeffrey archer padikara matiri irunthichi..lovely crisp writeup. And kudos to Nestle. Cadbury vanga porangalamay..atha pathi neenga onum solaliye

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  2. Athivas5/1/10

    As informative as ever,Ramesh! Repeating Gils comment, as always!! Thanks for all your efforts in making business interesting!!

    //As an aside , I never thought I would pen anything praising Nestle, given that I worked for a competitor of it for a long time. But then, praise must be given where its due, isn’t it ?//

    Too many values to learn from you!!

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  3. agree 200% with gils on your writing and 400% on savi on ur values. :) Praise should defn be given where its due.

    Ok for now let us open a business , can we ? :)

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  4. I saw this news yesterday about Novartis buying Alcon shares from Nestle. And it was like another piece of information. And now after reading your blog, there is a perspective to it!

    Actually, thanks to that divine moment when you decided to start blogging about business! :)

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  5. well said deepa, thanks a lot to the higher powers that brought u to the blog world and to us. I have re read this post twice now , ppl in business writing have to learn from you how to write simple and easy to understand, yet interesting articles.

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  6. In a difficult location, you still managed to blog, and turned out to be an excellent blogger. So here, you have been awarded the “Best follower Award”. Congratulations!

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  7. @gils - That is high high praise that's going to my head ! Especially coming from a master blogegr such as you. romba nanri thalaivare !

    No Nestle can't buy Cadbury, because of anti trust problems. Because Nestle already has a very big chocolate business, the anti monopoly rules in many countries, especially the UK, will not allow any takeover to go through. Nestle knows this, so won't even bid.

    @Savitha - Oh, what a sweet compliment. I am now definitely heady.

    @Sri - And you ? My head has gone way above the clouds. Thanks my friend. Yes, lets start a business ....

    @Deepa - Wow, what have I done today to deserve such high praise. Thanks so much. Yeah, the news item was what triggered this post. I find blogging enormously helpful to me . Earlier I would have simply read that news item and moved on. Now, since I use such news as raw material for writing and so have to read more and understand, which has been great to do.

    @Dave - I am truly honoured. Have left a thanks comment on your blog.

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  8. Kraft nestle company ilaya?? even in today's paper there are news abt kraft bidding for cadbury!!

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  9. Anonymous6/1/10

    You make the complex look simple and clear in business. I wish you wrote a book and published it.I am sure it will sell like hot cakes.

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  10. haojíle... hěn pèifu ni! :-) Each one of your post is so distinctive. Engrossing Read...

    Only great leaders provide such kind of long term view. And indeed, they derserve all the praise for what they do.

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  11. i think there are two parts to this story. one is to take a long term view which you have so beautifully narrated. the other is the value systems of the company. to honour an agreement signed 35 years ago in letter and spirit only goes to show how strong ethics means to the company

    at the cost of repetition of what others have said, you are an amazing narrator ramesh. IF you enter journalism, you could indeed turn the world around with your pen

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  12. @gils - No, Kraft is a completely different company and a competitor of Nestle. Kraft is headquartered in Chicago. Nestle is headquartered in Vevey, Switzerland. Kraft is bidding for Cadbury and might win even though the Board of Cadbury is opposing it.

    @Anon - Thanks very much. Very kind of you.

    @VA - Thanks - very impressed at your attempt at Chinese !! Yes, you need "greatness" to be able to take a really long term view.

    @Sandhya - Very right. It speaks volumes of the company. Their agreement with Liliane Bettencourt has been renewed every 10 years or so, but the spirit has been observed for the 35 years. Thanks for your very grand compliment. I am reeling punch drunk with the headiness of it all !!

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  13. Interesting history. It is so fascinating that few companies make diversifying acquisitions work where many fail. I wonder what makes them tick - do you think it is merely a question of having the right horizon? How do you inculcate a long term view - is it corporate culture or something different about how they are evaluated, compensated, etc...

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  14. Happy new Year Ramesh:)

    As always, reading your blogs brings a better and different perspective to the issue, not to mention making it easy to understand.
    Now, give up your expat status and come back to us.

    And I second the idea that you should begin a book, PLEASE!!!!

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  15. @J - Yes, a very complex area why so few companies make diversifying acquisitions work. I thinks its a combination of many things - long term horizon certainly, willingness to understand the differences in managing an unrelated business, resisting pressures from the market to "focus on core", not asking the business to justify its existence every two years and some good fortune too. How does the culture of longtermism permeate ? Don't know; but I think its a huge job of the CEO. Its her job to cushion the inevitable short term noise from the market from the operating management. It helps if you have a string of good results as Nestle 9or GE) have had.

    @Priya - Happy New Year Priya. You have completed the compliments completely going to my head !! Thanks so much.

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  16. Vinod7/1/10

    The Net nanny did not allow me to put my nmae on my comment yesterday, let me try again
    - I await in eagerness to see you write & publish a book on business.I am sure that, like me, many of the regular readers of your wonderful blog will echo the same feeling. The world will learn from your experience & wisdom and will be a better place to live.

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  17. thaliavaray..book optiona konjam seriousa consider pannunga...unga simple examples and easy writing wud make it a sure shot winner

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  18. Anonymous7/1/10

    Haha,ming zhi, I've beaten the Jin Dun Gong Cheng.
    I quite agree with you that praise should be given to those who deserve it.

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  19. @vinod - Congratulations on beating the nanny. The nanny has become quite a pain these days. Thanks for the very kind words.

    @gils - saar, enakku avvaluvulan ezhutha theriyathu. Thanks for being so kind.

    @Zhang - ha ha - congratulations on beating the jin dun gong cheng (the Net nanny in Chinese for non Chinese readers) Praise should absolutely be given for those who deserve it - watch this space on Sunday !!

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