Serial Acquirers

Conglomerate discounts, decentralisation, Roper, and Jan Wallander

Gustaf Hakansson
June 23, 2022
An excerpt from our recent email newsletter - turning conglomerate discounts into premiums.

Sources: Svenska Dagbladet, Mar 10 1972; Fredrik Karlsson Röko interview; Brian Jellison, GS Conference, Nov 2013; Neil Hunn, EPG Spring Conference, May 2018; Roper Technologies 2021 AR; Jan Wallander, Decentralisation - Why and How to Make it Work; Jan Wallander, The Budget - an unnecessary evil; Neil Hunn, Roper Technologies 2019 AR; Brian Jellison, JPM AT&D Conference, Mar 2014.

Disclaimer: This is not investment advice. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice. Any reference to or omission of any reference to any company should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. The author may hold positions in securities discussed. Any forward looking-statement is subject to risks and uncertainties. Read further disclosure in the Terms of Service.

Turning conglomerate discounts into premiums – a brief note

Three common arguments for conglomerate discounts are: “corporate orphans”, “corporate socialism”, and “empire building”.

Fredrik Karlsson said in our Röko interview that “conglomerates can lead to higher performance as long as you have a simple profit goal, decentralisation, and provide employees with trust.” Let us see how his criteria stack up against the discount forces!

Corporate orphans are conceived when HQ picks subsidiary favorites – often newly acquired ones – at the neglect of others.

Decentralisation should make orphanages obsolete, as HQ’s attention does not carry too much sway anyway. Because granting employees decentralised powers, i.e., trust – and not only responsibility – is a precondition for decentralisation.

Corporate socialism is a relative of many orphans but emphasises investment suboptimisation (profitable units subsidising less profitable ones) over attention.

Karlsson praised Jan Wallander, an academic and former Handelsbanken CEO who successfully employed decentralisation more than 50 years ago.

Wallander meant that budget elimination is a mere detail of true decentralisation. And that comparisons with previous performance – a simple profit goal – often is the key to abolishing budgets.

Ridding budgets enables trust; information flows freely instead of getting stuck as negotiating currency. And just like in a capitalist economy (the socialist foe), information transparency is a condition for healthy capital allocation within a firm.

Wallander emphasised that performance numbers should be presented objectively in public within the firm without any moralising comments.

The key is to influence not only external behaviour but also internal motivation, which is easily zapped by criticism even when it is restrained. A practical version of Buffett's: "Praise by name, criticize by category."

A company that shares Wallander's budget philosophy is Roper Technologies:

  • "we don't believe in budgets, we don't have budgets. So people never believe this." – Brian Jellison, Roper Technologies
  • “We pay our field executives based on year-over-year growth. Sounds like a simple idea, but it's superpowerful... if you pay based on a budget or planned attainment, you have a field team that is essentially incented to lie... if that were the case, where we wouldn't believe a thing they're saying, you can't have a culture of trust... So our government system may not be branded, but it is very effective – Neil Hunn, Roper Technologies
Roper Total Shareholder Return Graph
Total shareholder return since Roper's IPO

The metrics-driven culture based on incremental improvement works best for financially stable subsidiaries (the ones suitable for serial acquirers). They do not require long investment stretches before turning a profit and are therefore less prone to any politburo rationalising suboptimal capital allocation.

  • “If you have to deal with such complex calculations, you do not have a sufficiently profitable company to begin with!” – Fredrik Karlsson, Röko
  • “If there are no fixed plans and strategies, it is also easier to avoid falling into the trap of ‘throwing good money after bad’… it hurts to accept that one has made a mistake and lose prestige in the eyes of oneself and others” – Jan Wallander
  • “Initially some regional bank managers claimed that the reason why their results were below par was the poorer conditions for doing bank business in their part of Sweden. The reply was that, if this was really so, their resources should be moved over to more favourable regions. Interest in this type of criticism soon died out.” – Jan Wallander

Empire building (bad incentives) should be kept in check by a profit goal that considers the price of attaining any scale benefits on an FCF per share basis.

Often managers bet parts of the farm, thinking (be it subconsciously) that their weak company boards will yield to an adjusted lower “high water mark" from which to base bonus calculations should they fail.

  • “Finally, all leaders in our businesses have a very simple incentive – to grow EBITDA while maintaining or improving their balance sheet metrics. The incentive is focused, objective, and unnegotiated.  – Neil Hunn, Roper Technologies

On a final note, Jan Wallander was no dogmatist. E.g., he centralised business conducted with foreign banks. Instead, he stressed the spirit of decentralisation. A practical example he shared stuck with me: a manager wanting to control a decision asks a CEO “'But you do have a little influence, don’t you?'

Then it is important not to fall for the temptation to show how clever and powerful you are and with a smile reply: ‘Yes, I expect they’ll listen a little to me.’

If one reacts like that, the game is lost and there will never be any real decentralisation.”

And to wrap it all up, entrepreneurial drive coupled with a rational and tax-efficient internal capital market can warrant a conglomerate premium.

We have an exciting interview pipeline that I think you will like. Stay tuned!


Gustaf Hakansson at

P.S. Ironically, decentralisation enables the centralisation of tasks to comparatively advantaged actors. E.g., outsourcing increases the degree of specialisation, and company functions (HR, IT etc.) that get decentralised on a micro level, often get centralised on the macro level to a handful of third parties and SaaS tools.

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Worth reading!
Chris Mayer
Author of 100-Baggers
PM & co-founder, Woodlock House Family Capital
Brett Kelly
Founder & CEO
Kelly+Partners Group