Tuesday, January 5, 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 ?