Buffett + Heinz = Classic Application of Classic Lessons
Today’s report that Berkshire Hathaway, Warren Buffett’s company, along with 3G, will acquire Heinz, the venerable food products concern, reflects the acquisition criteria that Buffett has articulated for 20 years. Essays explaining and outlining those criteria have appeared in my book, The Essays of Warren Buffett: Lessons for Corporate America, since its first publication in 1997. Some excerpts follow (as they will appear on pages 211-214 of the forthcoming third edition):
We believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply: “Things are seldom what they seem, skim milk masquerades as cream.” Specifically, sellers and their representatives invariably present financial projections having more entertainment value than educational value. In the production of rosy scenarios, Wall Street can hold its own against Washington.
In any case, why potential buyers even look at projections prepared by sellers baffles me. We never give them a glance, but instead keep in mind the story of the man with an ailing horse. Visiting the vet, he said: “Can you help me? Sometimes my horse walks just fine and sometimes he limps.” The vet’s reply was pointed: “No problem—when he’s walking fine, sell him.” In the world of mergers and acquisitions, that horse would be peddled as Secretariat.
At Berkshire, we have all the difficulties in perceiving the future that other acquisition-minded companies do. Like [them] also, we face the inherent problem that the seller of a business practically always knows far more about it than the buyer and also picks the time of sale—a time when the business is likely to be walking “just fine.”
Even so, we do have a few advantages, perhaps the greatest being that we don’t have a strategic plan. Thus we feel no need to proceed in an ordained direction (a course leading almost invariably to silly purchase prices) but can instead simply decide what makes sense for our owners. In doing that, we always mentally compare any move we are contemplating with dozens of other opportunities open to us, including the purchase of small pieces of the best businesses in the world via the stock market. Our practice of making this comparison—acquisitions against passive investments—is a discipline that managers focused simply on expansion seldom use.
Talking to Time magazine a few years back, Peter Drucker got to the heart of things: “I will tell you a secret: Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work . . . dealmaking is romantic, sexy. That’s why you have deals that make no sense.” . . .
Beyond that, sellers sometimes care about placing their companies in a corporate home that will both endure and provide pleasant, productive working conditions for their managers. Here again, Berkshire offers something special. Our managers operate with extraordinary autonomy. Additionally, our ownership structure enables sellers to know that when I say we are buying to keep, the promise means something. For our part, we like dealing with owners who care what happens to their companies and people. A buyer is likely to find fewer unpleasant surprises dealing with that type of seller than with one simply auctioning off his business.
In addition to the foregoing being an explanation of our acquisition style, it is, of course, a not-so-subtle sales pitch. If you own or represent a business earning $ million or more before tax, and it fits the criteria [set forth below], just give me a call. Our discussion will be confidential. And if you aren’t interested now, file our proposition in the back of your mind: We are never going to lose our appetite for buying companies with good economics and excellent management.
Concluding this little dissertation on acquisitions, I can’t resist repeating a tale told me last year by a corporate executive. The business he grew up in was a fine one, with a long-time record of leadership in its industry. Its main product, however, was distressingly glamorless. So several decades ago, the company hired a management consultant who—naturally—advised diversification, the then-current fad. (“Focus” was not yet in style.) Before long, the company acquired a number of businesses, each after the consulting firm had gone through a long—and expensive—acquisition study. And the outcome? Said the executive sadly, “When we started, we were getting 100% of our earnings from the original business. After ten years, we were getting 150%.”
It’s discouraging to note that though we have on four occasions made major purchases of companies whose sellers were represented by prominent investment banks, we were in only one of these instances contacted by the investment bank. In the other three cases, I myself or a friend initiated the transaction at some point after the investment bank had solicited its own list of prospects.
We would love to see an intermediary earn its fee by thinking of us—and therefore repeat here what we’re looking for:
(1) Large purchases,
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer—customarily within five minutes—as to whether we’re interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give.
Our favorite form of purchase is one [in which] the company’s owner-managers wish to generate significant amounts of cash, sometimes for themselves, but often for their families or inactive shareholders. At the same time, these managers wish to remain significant owners who continue to run their companies just as they have in the past. We think we offer a particularly good fit for owners with such objectives, and we invite potential sellers to check us out by contacting people with whom we have done business in the past.
We frequently get approached about acquisitions that don’t come close to meeting our tests: We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auctionlike sales: “When the phone don’t ring, you’ll know it’s me.”