While a strength of Leucadia (LUK) may be found in its aggressive approach to acquisitions the business may be enhanced by three main initiatives: minimizing key-man risk, a focus on greater diversification, and a reorientation toward buyouts rather than mere equity stakes. All else being equal, I believe the implementation of these three enhancements will provide long-term stability for Leucadia and generate increased profitability for its shareholders.
Leucadia maintains interests in fourteen companies nationally, ranging from banking and lending to manufacturing to real estate. Since its founding, the company maintained its focus not only on the acquisition of new businesses by venturing into unexplored spaces but also on the expansion of existing business lines. The focused and aggressive approach to acquisitions has paid dividends and will continue to do so.
However, while Leucadia stays true to its business model, key-man risk remains central to investor concerns, jeopardizing the long-term viability of this otherwise extraordinary company. Since 1978, Ian Cumming and Joseph Steinberg, both currently in their 70's, have owned over 10% of outstanding shares each. Business decisions ultimately rely on the say of these co-founders. Come 2015, their employment contracts will expire, leaving investors with an uncertain future. Beyond the concerns around the co-founders' significant control over Leucadia, the company will be left without vision and guidance. This may be mitigated in the present and avoided in the future by distributing company interests more broadly among Leucadia management and shareholders. Consequently, investor concerns will be assuaged because the success or failure of the company will not be determined by any one individual.
Leucadia would be further strengthened by diversification. While the company maintains interests in a broad stretch of industries, almost 90% of revenues come from beef processing services. This leaves the company's profitability dependent on just one business within a sector that is subject to commodity volatility. The recent acquisition of the remainder of the Jefferies Group proves that some steps are being taken to address this over-concentration. However, further diversification is required for Leucadia to be a true bulwark against economic and financial downturns.
This drive toward diversification may be accompanied by a reorientation toward buyouts rather than minority or majority equity stakes. Buyout activities will secure the alignment of interests as Leucadia shareholders will be full owners. Troubles in Leucadia's past are not hard to recall. In 2006, Leucadia acquired a substantial minority stake in Fortescue Metals Group and, since this investment, Fortescue decided to issue additional royalty notes, thereby diluting Leucadia's interest. The investment suffered as a result. A directed focus toward buyouts will substantially increase Leucadia's flexibility as a holding company and provide greater predictability of the success of an acquisition.
Leucadia National Corporation has endless potential as management seeks to expand and strengthen existing businesses and add value through strategic acquisitions. A keen focus on minimizing key-man risk, diversifying revenue streams, and increasing buyouts will, I believe, further enhance the operational integrity of Leucadia and ultimately multiply shareholder value.