Best Owner Thesis

“When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” – Warren Buffett

Is it worthwhile for an organization to invest in non-correlated businesses for the sake of risk diversification? As shown in the graph, this is not a good idea.

Firstly, investors can diversify risks much more effectively and at lower costs than the organization can. Secondly, the organization needs a synergistic effect when operating various businesses, which cannot be achieved by spreading focus too thin.

There is a concept of the “best owner,” which suggests that for any given business, there exists an owner who can manage it better than others. This often relates to the synergistic effect arising from competencies, culture, access to resources, etc. Managing non-correlated businesses implies that there are potentially better owners for these businesses who will eventually win in the competitive market.

Below is a table format for analyzing business units, which provides an understanding of businesses through fundamental data. With such analysis, managers can see which units create value and which destroy it.

Additionally, alongside the evaluation of business units, an analysis is often conducted to determine which direction has the most potential for growth and whether this direction will generate value if growth occurs (Excel File).

Source:

 *Valuation, Measuring and Managing the Value of Companies – by McK.&Co, T. Koller, M. Goedhart, D. Wessels