Westport Compass finds its own way
By Rob Varnon
Updated: 04/30/2009 09:45:28 AM EDT
Joseph Massoud is chief executive officer of Compass Diversified Holdings in Westport. The firm has purchased 16 companies and profitted in selling 10 of them, he said. (Jesse Neider/Staff photo)
A holding company's success is driven by the strength of management and its subsidiaries, but Westport-based Compass Diversified Holdings has one other challenge: establishing its own identity.
In an article highlighting Compass' strengths and affordable stock price, Barron's Online dubbed Compass a "poor man's Berkshire Hathaway."
"It's the kiss of death," said Paul Schatz, president of Woodbridge-based Heritage Advisors. "There are no 'poor man's Berkshires' or new Warren Buffetts. Those never pan out."
Schatz said companies, just like people, have to make their own mark in the world. Otherwise, they're just following a formula that's been done, and it's difficult to catch fire that way.
Compass is a relatively young firm. It was formed in 1998 as a private equity manager for a charitable organization and went public in 2006. The company's main business is to buy majority stakes in privately controlled businesses that management believes are in strong positions in their particular industries. It's been paying a healthy dividend, but Schatz and another investment advisor expect that to be trimmed.
Compass appears to perform in sync with the market, when what investors should want are "stocks that lead on the way up and lag on the way down," Schatz said. He pointed to Cheshire-based Alexion Pharmaceuticals as a company that fits this bill.
There are other fundamentals to look for in a company like this, including the strength of its
management and its subsidiaries.
Compass' management is made up of a veteran cast of business and management consultants, including its chief executive, who worked for McKinsey & Co., a global consulting firm.
Compass Chief Executive Officer Joseph Massoud said the Barron's article was complimentary.
"I guess being compared to Berkshire Hathaway is a good thing," Massoud said in a telephone interview. But he added there are fundamental differences between Compass and Berkshire.
"They're run by the greatest financial mind in the last century, and we're not," Massoud said. "We tend to acquire control positions."
Berkshire buys minority stakes in solid companies and holds them for a long time, he said. Compass is more flexible with its subsidiaries and tends to hold them with an eye on a five-year horizon.
Compass has purchased 16 companies and profited in selling 10 of them, including two sales last year that Massoud said were made because management was concerned about the credit markets and wanted to have some cash available. The company was able to sell the companies for sizeable gains, he said.
Massoud said he's satisfied with the six companies Compass now owns. None of them have any debt; the parent company does all the borrowing, he said.
I use an RSS aggregator called Snarfer (free download at downloads.com, I think; a very small program that uses very little resident memory). Then, I go to Google news, plug in the name of each of my stocks, get the RSS feed and plug it into Snarfer. Then Snarfer (which resides on my toolbar), alerts me to any news on any stock I own. (You can set Snarfer to check for fees every minute, every hour, every day, whatever). I find lots of stuff that isn't on any financial pages. And it is much, much easier than perhaps my description sounds.
If you want details, let me know.
Compass owns Fox Factory Holding Corp. of California, which makes high-end suspension products for mountain bikes and power sports. The Westport company bought Fox in January 2008 for $80.4 million. Its other companies are: Compass AC Holding Inc., a Colorado-based maker of circuit boards that specializes in quick-turn prototyping; AFM Holdings Corp., a Mississippi-based maker of furniture; CBS Personnel Holdings Inc., a staffing services company based in Ohio; Anodyne Medical Devices of Florida; and HALO Lee Wayne LLC, a marketing and promotional products and management company headquartered in Illinois.
Compass looks for businesses that are well-managed but could use some help expanding into new areas or developing new strategies, Massoud said. Compass also is not looking for troubled companies being sold at fire-sale prices.
"We're not turn-around guys," he said. "We walk away from them if all they really want is the capital."
A key reason for Compass to get involved with a firm is that the company has a reason to exist, he said. That means it produces something that's not easily replicated and is in a strong position in its market. Compass focuses on U.S. companies.
Massoud said management sits down with the ownership and asks them if they want to buy themselves out from under a large corporate parent, find new markets, cut costs and work on plans to keep the company going after the founder retires.
The biggest challenge is finding companies that are worth buying, he said. Compass has ready access to several credit lines, including a $300 million acquisition revolver that will be available until 2013.
The company also has $119.4 million in cash on hand and additional borrowing options.
Massoud would like to make an acquisition or two within the next 12 months, but he said it's difficult. Old family businesses, which might have been good targets a year or two ago, aren't being sold because the families aren't seeing the value in a sale, he said.
"The sellers we're seeing fall into three buckets," he said. Each presents opportunities for the seller and for Compass.
"¢ There is the large corporation selling non-core subsidiaries or trying to settle debt.
"¢ The private equity funds, selling businesses to pay off debts and preserve a profit on aging deals
"¢ And there are companies such as Fox, which Compass bought to create a succession plan to keep the company alive after the founder retires.
Massoud was excited about Fox, which is a well-known brand in the mountain biking community. Since the acquisition, Fox has been moving into new areas, including military equipment, where it's providing shocks absorbers for vehicles.
Joseph Tatusko, chief financial officer for the investment advisory firm Westport Resources, said he sees the economy as the main hurdle for Compass.
"Their operating companies seem especially susceptible to the downturn: furniture, bike parts, promotional do-dads, employment staffing services and circuit boards. All will see revenue declines this year," Tatusko said. But on the flip side, Compass seems well managed, he said.