Transcript: Seeking Value — Industries Targeted by Disruptors


Transcript: Seeking Value — Industries Targeted by Disruptors

[Richard S. Pzena, Chairman, CEO and Co-Chief Investment Officer, Pzena Investment Management]

I think what's facing almost every investor today in the market is, one, is the market expensive? And two, isn't the world a new place? Look at all the technological innovation that's going on, in digital advertising, in social media, in electric cars, in the sharing economy, so much that we've conditioned ourselves to believing now that this is a disruptor or disruptee marketplace. And of course everybody wants to own the disruptors. Nobody wants to own the disruptees. Technological structural change is predicted far more often than it actually happens. Change does happen. But there are franchises that are embedded - deeply rooted in society - that are hard to disrupt out and very often take advantage of the disruptive technologies to enhance their own franchise.

[Banking disruptors]

Probably the best example is the banking sector. Financial technology or fintech has been a hot, hot topic. And it's interesting, I had a recent meeting with the CEO of Citibank. He said three or four years ago, I would have a 26-year-old CEO of a fintech company come to my office and say to me I'm going to eat your lunch because the banking system doesn't need to exist anymore. Today I'm the biggest customer of these fintech companies because I can employ it in my business and enhance my franchise. So an amazing statistic, and this comes from J.P. Morgan. The market share of deposits among the four largest American banks is double for millennials what it is in their broader population. So why are the people that are so in tune with new technology, putting their money in Citibank as opposed to something else? And the answer is, because Citibank has the better technology. And so three or four years ago, you could have bought any bank you wanted for below its book value on the theory that they were going to be disintermediated out of business by mobile apps, and now they're the ones who own the marketplace. The banks were viewed as the disrupted. The fintech companies were the disrupters. Picking which fintech company was going to be the winner, that's hard, right, that's gambling. Picking the one that is the franchise that's well established for a hundred years that can exploit the technology, that's a little bit easier. And you're buying it at much, much lower valuation. And that today exists in numerous forms in the marketplace.

[Technology disruptors]

It extends to technology, where if you're in the cloud, you win. If you're not in the cloud, you lose. Even though there are many software companies, that were not cloud based, that are converting to cloud based, where their product is deeply embedded in the way that we do business, and the odds that they go away are very low. We saw that with Microsoft successfully defending their franchise. The market’s fear of disruption can value franchises that are hugely embedded in our way of living as if it’s going to be disintermediated, going away, because they have cloud-based competitors who are superior. But the people who pay a license fee every year, for the last 50 years, the idea that that’s going away like that, is almost ludicrous so you have this very nice risk/reward trade off. That’s today’s environment that we’re dealing with.

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