The Rise of the Baby Conglomerates
An in-depth look at small- and mid-cap diversified industrial firms.
The basis of any moat argument for a diversified firm is centered upon some core competency that filters down among its smaller business units. In the case of Danaher (DHR), the company takes the tremendous institutional knowledge gleaned from the lean manufacturing principles of the Danaher Business System (DBS) and imposes this process on every one of its segments, enhancing cash flow generation. General Electric (GE) and 3M Company (MMM) use their massive research-and-development bases to create technologies that are not only useful for an individual segment, but implemented throughout the organization.
Finding these competencies within the smaller firms is difficult, but a solid indicator is when they find ways to creep into new end markets as avenues for growth dissipate in their current location. For example, Actuant ATU pushed into energy asset management, away from its core Enerpac hydraulic bolt tightener business. Roper Industries' (ROP) foray into smart card technology, away from its experience in RF identification and water metering technology, also fits this category. SPX (SPW), on the other hand, has struggled to integrate its businesses during the last several years, with no natural linkage among segments.
Daniel Holland does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.