Is Amazon like Berkshire Hathaway, Circa 1985?

I answered this question on Quora, here.

The Question

Is Amazon like Berskshire Hathaway, circa 1985? Already having grown incredibly, and likely to continue to grow dramatically? From my perspective it appears unstoppable…am I wrong or right?

My Response

I think your question boils down to

Can Amazon turn into a well managed conglomerate like Berkshire Hathaway is?

I don’t know the answer to this question directly. That requires a crystal ball. What I can do is to provide some perspective, and from their we can make educated guesses.

Conglomerates are hard to sustain

There was a time when conglomerates were popular. Think of companies like General Electric, Tyco, etc. The trick to running a conglomerate is to find a way of creating additional value than just sum of its parts. 1+1 truly needs to be greater than 2, otherwise the conglomerate structure has no advantages over separate companies. Generally, where conglomerates destroy value, there are now well funded activist investors who push the company to break up into constituent parts, and thus release the value.

GE created additional value due to its management excellence in Jack Welch’s era. Tyco was run well, although ostensibly a lot of its value creation was based on its tax domicile.

Berkshire Hathaway is an anomaly because it is run as a portfolio of businesses with the top managers being excellent capital allocators. They have excellent businesses, but that is not where the advantage lies. These businesses will be excellent on their own too (and were excellent before Berkshire Hathaway purchased them). Buffett and Munger wisely understood where their strengths are and they leave the businesses alone.

Amazon does acquisitions but is still mostly a retail business

If you look at the footer of the Amazon website, they list all the different companies they have acquired over the years. These include such disparate businesses as http://zappos.com (shoes), http://diapers.com (diapers), and Goodreads (book reviews). While all these businesses have different products or services, you will note that they are all singularly dedicated to retail.

Yes, I am aware of the cloud and other tech related products/services. They might get into offering logistics and distribution services to others too (Prime Air, for example), but pretty much everything they have built or are developing goes on to pushing their singular focus of being the world’s largest shopping destination.

They have found their focus and have stuck it it over the years.

Washington Post is not part of Amazon. Blue Origin is not part of Amazon. Can they be integrated into Amazon in the future? Perhaps, but most likely not. There just doesn’t seem to be any useful reason to do so.

So, I do not consider Amazon to be growing in a Berkshire Hathaway like conglomerate. So the answer to your question is NO.

But wait! There is more…

There is one way Amazon and Berkshire Hathaway are identical.

Both companies optimize the heck out of their core strengths.

Berkshire Hathaway does a fantastic job of

1. Finding great businesses with deep competitive advantages and acquire them
2. Allocate capital intelligently between the portfolio companies, and,
3. Let the managers do what they do best – run their businesses to maximize the value over the long term (not just for the next quarter). Most businesses today, if they are public, operate on short term quarterly cycle. They have to report to the wall street. Berkshire Hathaway takes away this pressure and allows its companies to engage in long term strategic growth

Amazon does a fantastic job of

1. Finding great complimentary acquisitions and integrating them within their retail channel
2. Relentlessly test and optimize each part of the buying cycle, and,
3. Famously be okay with losing money for years as they execute their long term strategy over a decade or more

Conclusion: Amazon and Berkshire Hathaway are two very different companies that are very similar in some respects

So, will Amazon grow into the next Berkshire Hathaway?

I don’t think so.

But it may be able to create shareholder wealth that far exceeds what Berkshire Hathaway was able to do, for a couple of reasons

1. The core advantage of Berkshire Hathaway pretty much lies in 2 men – Buffett and Munger. After them, it is hard to see the advantage carry on. The 2 investment proteges have done well, but arguably not shown the same temperament and skill as Buffett and Munger. In the next 2 decades, I fully expect Berkshire Hathaway to be broken up in many different companies
2. Amazon on the other had has built systems, processes, and a culture of optimization that can last long after Bezos has called it a day. There are limits to the growth, and antitrust issues can hound Amazon more then Berkshire. But I think it can navigate these waters.

Hope this helps in adding some perspective and answers the question at a few different levels.

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