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Heritage Bankshares Inc. Message Board

  • barkingdog78 barkingdog78 Nov 25, 2012 2:00 PM Flag

    CEO's "simplicity" theme is good for shareholders!

    Always invest in a simple business for two reasons: (1) As Buffett says, there's a lot less chance you are going to get scammed or miss something important; and (2) There's a second way to profit: a buyout.

    Simplicity is good for the banking business as an operating model ... but it also positions you for a buyout. Potential acquirers want to acquire a simple business with a clean balance sheet. Banks with a lot of moving parts aren't good buyout targets ... no one can figure out what they have in real assets; then what to do with the parts; all the different divisions and employees; etc. Straining for growth with complexity probably does juice profits in the short term (e.g., if you jump into something hot, such as the mortgage refinance boom), but it is really inefficient in the long run. All the complexity creates friction in the gears of the basic smooth operating model - alternatively, if you kept things simple, you could spend all your time focused on the core business without all the distractions.

    But here's the problem: With either operating model, you eventually hit a "wall" in banking. The diverse/complex model with a lot of different divisions and services eventually collapses, because management can't really keep so many "balls in the air" at one time. The risks are a lot higher, and eventually one of the divisions has a loss or some other big problem because the CEO doesn't know what they are doing. With the simple model, the risks are a lot lower and the income is more consistent, but eventually customers want more services. And that's a problem, because banking customers are easily subject to "poaching."

    But the better choice by far is to be the simple business: The advantage of the simple model is that you always have the option to sell out, because, remember: Potential acquirers want to acquire a simple business ... they want to know what they are buying! If one goes with the complex model, you get higher profits in the short run, but once a problem strikes, you are stuck with it ... maybe forever. So given a choice, SIMPLE IS GOOD!

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