What goes up, must come down. What is built up, eventually breaks down.
Last year, the idea that the companies that made themselves huge doing deals over the last few years thanks to low interest rates are set to crumble into pieces hit Wall Street.
Now it is gaining currency.
At the SkyBridge Alternatives Conference (SALT) in Las Vegas on Thursday, activist hedge fund manager Clifton Robbins of Blue Harbour said that one of the major themes he’s looking at in his fund is the “de-conglomeratization” of American companies.
Basically, he told the crowd that he’s looking at companies that may be able to unlock value for shareholders by slimming down, and selling off businesses that are less part of their identity and more excess fat.
You may recall that JHL Capital’s James Litinsky freaked Wall Street out when he presented the idea that the market may do this to companies whether they like it or not. Robbins’ idea is a little friendlier, but it’s the same concept.
The companies — we’re calling them “platform companies” these days — that got bloated are going to have to slim down.
Now, not everyone believes this. In his annual letter to shareholders, Bill Ackman defended his platform company holdings, especially embattled drug maker Valeant.
“Our biggest valuation error was assigning too much value to the so-called ‘platform value’ in certain of our holdings,” he said in his year-end letter to investors.
“We believe that ‘platform value’ is real, but, as we have been painfully reminded, it is a much more ephemeral form of value… as it depends on access to low-cost capital, uniquely talented members of management, and the pricing environment for transactions.”
Quick question from the guy in the back
Low cost capital and pricing are both elements that could be about to change. This has happened before. In the 1960s there was a so-called ‘Conglomerate Boom’ where companies got fat too.
And there’s another element here we want you to consider. In a session with reporters during SALT, we asked legendary short-seller Jim Chanos what he thought about Robbins’ comments and he passed along this warning to you readers.
“Wall Street can get itself excited about both sides of the same coin,” he said, referring to building things up and breaking them down.
The question is, where’s the real value here?
“In my world,” Chanos said, “we’re seeing a lot more emphasis on financial engineering rather than financial analysis.”
Then he asked: “If it was bullish to put them together, why is it bullish to pull them apart?”
Good question. Watch yourselves. Things are getting loopy out there.