'Baby Berkshire' Leucadia matures with Jefferies deal

Mon Nov 12, 2012 2:27pm EST

* Cumming, Steinberg seek to emulate Buffett

* Company transitioned from insurance to industry

* Backed Jefferies after teetering in 2011

By Ben Berkowitz

NEW YORK, Nov 12 (Reuters) - Lots of companies try to turn themselves into mini-Berkshire Hathaway -style conglomerates, but Leucadia National Corp has had more success than most at pulling it off.

The diversified services company, which struck a deal on Monday to acquire investment bank Jefferies Group Inc for $3.6 billion, models itself in more than cosmetic ways on Warren Buffett's empire.

There is the spare corporate website, which bears a striking resemblance to Berkshire's similarly plain home page, plus the annual letters from Chairman Ian Cumming and President Joseph Steinberg, which read so much like Buffett's February missives that any reader could be forgiven for confusing the two.

Leucadia, whose holdings range from real estate to mining, even has a joint venture with Berkshire - a commercial mortgage business called Berkadia that is one of the largest in the country. No wonder, then, that the company, although not widely known, is sometimes called "baby Berkshire."

"Overall, Berkadia has made excellent money for us, and Joe and Ian have been terrific partners," Buffett wrote in his 2003 investor letter.

In their latest annual letter, Steinberg and Cumming noted that Jefferies caused Leucadia huge losses in 2011, as the stock plunged in the wake of MF Global's collapse. Leucadia already owns about 29 percent of Jefferies.

They had nothing but the highest praise, though, for the way the bank's management reacted - in textbook Buffett style, and in keeping with their long-stated admiration for Jefferies boss (and now Leucadia CEO) Richard Handler.

"We are proud of our ownership and association with Jefferies and believe their response was their nest hour. Jefferies enjoys a great deal of good will in its middle market and we are grateful to its clients and customers who stood by them," Cumming and Steinberg wrote.

FRIENDS AND PARTNERS

New York-based Leucadia operates in beef processing, wood and plastics manufacturing, casino gaming, real estate, medical product development - even wine, among its many other interests. (In fact, the U.S. Securities and Exchange Commission still categorizes it as a lumber and wood products company).

In 1978, fellow Harvard graduates Cumming and Steinberg took over a struggling financial services company known as Talcott National Corp and ultimately changed its name to Leucadia. They remain the largest shareholders, together holding more than 18 percent of the stock.

(In their 2007 annual report, the pair confessed the name was simply picked off a California road sign, as they liked the sound of it and thought it had a good chance of not already being taken in New York).

They immediately pursued a strategy familiar to anyone who knows anything about the "Oracle of Omaha": Buy attractive assets cheaply and run them better than the last guy.

Leucadia's fifth-largest shareholder, Horizon Kinetics LLC, placed the company's success squarely on the two men's shoulders in a quarterly report last month.

"We believe Leucadia is a well diversified, well capitalized, profitable company with the same management in place that created this history," Horizon managers wrote, noting that as a bonus, the stock traded for less than book value.

"A low valuation is one of the better predictive attributes and is particularly compelling when combined, as in the case of Leucadia National, with proven owner-operators."

A 2005 Kiplinger's profile of the two headlined "Better Than Buffett" - one of the rare articles to focus on the publicity-shy managers - noted that from 1978 through 2004, Leucadia's returns were actually 6 percentage points better than Berkshire's Class A shares.

Since then, however, the tables have turned dramatically. Berkshire is up more than 45 percent since the start of 2005, while Leucadia is down just over 10 percent.

Over that period, Berkshire has been boosted by major acquisitions like the Burlington Northern Santa Fe railroad and the chemicals company Lubrizol, while Leucadia made difficult forays into the telecommunications market and took substantial lumps during the financial crisis.

INSURANCE MONEY

Despite the divergent stock prices of late, the casual observer could still be forgiven for comparing Cumming and Steinberg to Buffett and his vice chairman, Charlie Munger - savvy businessmen who figured out early that two heads can be better than one. Like those men, they found much of their fortune in insurance.

Through the 1990s, Leucadia was primarily a multiline insurer offering both property and life coverage. The insurance business was more than 80 percent of Leucadia's revenue, in fact. Even then, though, it had tentacles in automotive lending and the manufacturing of do-it-yourself home improvement products, among other pursuits.

By 2000, it had added wine production, real estate and the mining of precious metals to its stable. Before long, insurance was gone and what was left was a Berkshire-esque conglomerate that still had a large hand in high finance but also dabbled in virtually any other sector with attractive but cheap assets.

In the last investor letter, the two men struck a cautious tone, especially given the unsettled economy and the partisan rancor in Washington over the national debt. But in true Buffett-like fashion, they promised to keep growing anyway.

"We are enthusiastic about the future of our broad array of operating businesses and investments and have our eyes open for additional acquisitions. Never fear, if a good deal comes along we will nd a way," they wrote.