4 Extreme Makeovers

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"The more things change, the more they remain the same" is attributed, in slightly different iterations, to French novelist Jean-Baptiste Alphonse Karr. It rings true in human nature. What motivates us today has changed little from what motivated us 1,000 years ago.

The story is different in business: The more things change, the more ... well, they change. What's more, change often isn't a choice. Consider 1900s transportation: Nearly all the carriage makers failed to change into automobile makers, so nearly all are gone today, as are nearly all the buggy-whip makers, which failed to embrace the automobile-component opportunity.

But change doesn't always translate to a failure fait accompli for the establishment. Some companies have overcome their sunk costs and former glory to embrace the zeitgeist. For example, International Business Machines (NYSE: IBM) is no longer a puncher of punch cards, and General Electric (NYSE: GE) is no longer a mere manufacturer of lightbulbs. Good for them, because if either had clung to their 1940s forte, neither would be Dow Jones Industrial Average components today.

You say you want a revolution?
IBM's and GE's transformations were evolutionary rather than revolutionary. Not so for Berkshire Hathaway (NYSE: BRK-A). In 1962, Warren Buffett began buying shares of this middling textile business. By 1963, he was the controlling shareholder. By 1967, Berkshire began buying insurance companies. By 1970, Berkshire was an insurance company -- and a profitable one. Berkshire's profits from insurance, banking, and investments exceeded its textiles profits 10 times over that year. The rest, as we all know, is heavily documented history.

Berkshire got the revolution right. Others get it right less so, and none less so than Jackpot Enterprises -- a former player in the pedestrian but remunerative business of gaming machine routes (basically, bar- and retail-based slot machines) in Nevada.

The business was profitable. In 1999, Jackpot earned $4.6 million on $95.7 million in sales, carried no long-term debt, and boasted $47.6 million in cash and cash equivalents. In 2000, Jackpot remade itself in a complete, revolutionary, and hip way, changing its name to J-Net and selling the gaming routes, deciding losing money as an "Internet incubator" (the term is so droll in retrospect) was preferable to making money collecting fivers from slot machines.

Jackpot proved much more adept at losing money in the Internet biz than it ever was at making money as a slot-machine jockey by losing $48.7 million in 2001 and $25.2 million in 2002.

Comparing Berkshire Hathaway and Jackpot Enterprises presents two obvious takeaways: Necessity being one. Berkshire had to remake itself; failure as a textile factory was assured. In contrast, success as gaming-route purveyor, if not assured, was likely. Jackpot was making money and generating gobs of cash flow.

Timing is the other. Few investors were rushing into the insurance business in 1967. Many investors were rushing into the Internet business in 2000. Following the crowd rarely produces sustained winners.

Change we can believe in
The following four companies are remaking themselves in the revolutionary mode; they have little choice but to eventually fail if they don't. They are still generally known by their former business models, but I suspect three to five years hence, it will be otherwise.  

Company	Reason	Action
Dell (Nasdaq: DELL)	Computers-via-Internet ordering has become a price-taking commodity business.	Dell's $3.9 billion purchase of Perot Systems enables it to play in the higher-end business IT service space.
Deluxe (NYSE: DLX)	Check writing is declining 5% to 7% annually.	The move into small business services and financial services, such as fraud monitoring and payroll services lessens its reliance on checks.
Ennis Business Forms (NYSE: EBF)	Digital media, Internet delivery, and electronic storage are eroding the commercial printing market.	Ennis' purchase of Alstyle Apparel diversifies its business into the high-quality activewear market.
Eastman Kodak (NYSE: EK)	Do you know anyone outside the photography profession who uses celluloid film?	Digital imaging and corporate communications now account for two-thirds of Kodak's revenue.

The imperative to change creates uncertainty -- and opportunity, as most of the four are price laggards. But I think they, unlike Jackpot Enterprises, are getting it right on price and time, which means investors could also be getting their shares right on price and time.