Berkshire Beyond Buffett(71)
In the mid-1970s, the Marmon Group made a big acquisition: Cerro Corporation, a conglomerate engaged in mining, manufacturing, trucking, and real estate, with $800 million in annual revenue. The corporation’s profile conformed to the Pritzkers’ substantive acquisition criteria: assets were worth more on the block than in operation. But it was unusual in other ways, being a hostile takeover of a publicly traded corporation.5 Bob Pritzker completed the arduous task of reshaping the company’s culture, which was overly structured and tense, inculcating instead an entrepreneurial spirit.6
More typical acquisitions promptly followed. In 1977, the Marmon Group bought Hammond Corporation, the organ maker that also owned a glove manufacturer, Wells Lamont. The organ business was a disappointment, but the glove business became the leader in the field.7 In 1978, the Marmon Group bought American Safety Equipment Corporation, maker of seatbelts.
By the end of the 1970s, the Marmon Group was a prosperous, valuable, and highly diversified conglomerate. Member companies engaged in manufacturing agricultural equipment, apparel accessories, automotive products, cable and wire, piping and tubing, musical instruments, and retailing equipment, as well as services involving mining and metals trading.
In 1981, the Marmon Group made its second big acquisition: the $688 million takeover of Trans union Corp., a conglomerate that was once part of the empire of John D. Rockefeller Sr.8 Chief businesses were making and leasing rail tanks for transporting oil and other cargo and a consumer credit service. Aside from size, this deal epitomized the Pritzker model: Jay found value in its successive years of losses that produced investment tax credits to reduce the Marmon Group’s tax expense; Bob discerned valuable operating gems hidden throughout.9 (The deal also heightened director attention in American boardrooms after an influential court held Trans union ’s directors personally liable for failing to become informed about the background of the transaction.10)
Through the 1980s and 1990s, the Marmon Group continued acquisitions regularly in an array of basic businesses. The acquisition rate was intense, although many deals were of modest size: thirty acquisitions in 1998, thirty-five in 1999, and twenty in 2000.11 Assimilation was not a problem, as the company operated in a decentralized manner. Most succeeded, and only a handful had to be shut down. None was sold, although in 2001, Marmon divested two longer-standing companies, Jamesway, a farm equipment company, and Long-Airdox, a maker of coal-mining equipment.12 From the early 1990s, Marmon’s subsidiaries increasingly made bolt-on acquisitions to add growth.
As early as the late 1980s, critics questioned whether the Marmon Group’s vast size, frenetic growth, and extreme diversification could be maintained within its corporate structure.13 Who but Jay and Bob Pritzker could administer such a sprawling behemoth, they wondered? In 1999, Jay died; in 2002, Bob retired (he died in 2011).
When Bob retired from the Marmon Group, he carved out the businesses that made up Colson to run for himself, and Trans union ’s consumer credit division was moved elsewhere in the Pritzker family empire; both were later sold.14 But little else changed at the Marmon Group, and under the stewardship of two successive chief executives, John D. Nichols (2002–2006) and Frank S. Ptak (since 2006), the Marmon Group has continued to prosper.
Both Nichols and Ptak spent most of their careers in senior positions at Illinois Tool Works Inc. (ITW). A third-generation Chicago-based manufacturer formed by Byron L. Smith in 1912, ITW has much in common culturally with the Marmon Group, and the two grew in tandem during the latter part of the twentieth century.15 ITW, however, is massive: in 2005, ITW operated 625 businesses in forty-four countries, built through a combination of internal growth and opportunistic acquisition.16
To manage such an enormous conglomerate, Nichols, Ptak, and other ITW executives applied a management principle called 80/20. The 80/20 principle refers to a thought process based on a common statistical distribution: 80 percent of given outcomes are contributed by 20 percent of the inputs. At ITW in the 1980s, Nichols and Ptak discovered its utility when studying why profit margins were eroding.
Repeatedly across the company, they found that 80 percent of sales came from 20 percent of the product mix, and 80 percent of profits were due to 20 percent of customers. Armed with the 80/20 insight, they zeroed in on what specific parts of the business contributed most and least to overall performance. With laser focus, they allocated time and resources to the divisions, products, and customers that drove the greatest profits. The effect was to increase decentralization, which made ITW’s vast size an advantage.