Berkshire Hathaway’s Unique Permanence
posted by Lawrence Cunningham
Permanence is the most distinctive trait of Berkshire Hathaway, the diversified Fortune 10 conglomerate whose unusual features, thanks to iconoclastic chairman Warren Buffett, are legion. Permanence is salient because, unlike any other conglomerate in history or rival in the acquisitions market, Berkshire has never sold a subsidiary it acquired.
Ironically, the experience that led to this unique practice culminated in the reluctant sale of Berkshire’s original business, textile manufacturing, in 1985. That sale was so painful for management, employees and other stakeholders that Berkshire committed to avoid a replay.
Instead, it adopted a policy of up-front screening, rigorous acquisition criteria that cut the chances of owning a business that would be tempting to sell. Berkshire then turned that policy into a huge advantage, assuring prospective sellers of companies a permanent corporate home.
In turn, the assurance of permanence appealed strongly to the kinds of companies that would meet Berkshire’s rigorous acquisition criteria: those owned and loved by families, entrepreneurs and other owner-oriented types. Some fifty acquisitions later, the promise has never been broken.
That is why I found so peculiar the following passage in William Thorndike’s well-selling book, The Outsiders, a profile of select big-name CEOs, including Buffett, whom Thorndike considers to have been similar to each other but different from everybody else. After referencing the 1985 closure of Berkshire’s ailing textile business, he writes:
This was a key decision for Berkshire and makes a more general point. A critical part of capital allocation, one that receives less attention than more glamorous activities like acquisitions, is deciding which businesses are no longer deserving of future investment due to low returns. The outsider CEOs were generally ruthless in closing or selling businesses with poor future prospects and concentrating their capital on business units whose returns met their internal targets. As Buffett said when he finally closed Berkshire’s textile business in 1985: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
This makes it sound as if Buffett and Berkshire have been ruthless about closing down companies, which is totally misleading. True, Buffett repeatedly says he would follow the advice quoted, but Berkshire’s policy and practice over three decades has meant never needing to do so. The more apt statement of Berkshire’s policy appears in the following passage from Buffett’s 2002 letter to its shareholders:
Berkshire acquired some important new businesses—with economic characteristics ranging from good to great, run by managers ranging from great to great. Those attributes are two legs of our “entrance” strategy, the third being a sensible purchase price. Unlike LBO operators and private equity firms, we have no “exit” strategy—we buy to keep. That’s one reason why Berkshire is usually the first—and sometimes the only—choice for sellers and their managers.
Other conglomerate builders might have been ruthless in closing or selling businesses because they applied a less-rigorous entrance strategy than Berkshire or because they believed in turnaround situations, businesses with uncertain or merely fair economic characteristics or run by mediocre managers.
Berkshire avoids such situations and became the buyer of choice by making ironclad commitments to retain businesses, through thick and thin—and to give managers operational autonomy and not load subsidiaries with debt. That strategy has distinguished it from rivals—including some following the model of the ruthless CEOs that Thorndike seems to endorse.
Aside from the 1985 divestiture of Berkshire’s textile business, you have to look hard within Berkshire for anything remotely similar to ruthless divestiture or selling that Thorndike uses the Buffett quote to illustrate.
I can only think of one example, from last year: after acquiring scores of regional newspapers that now form part of BH Media, Berkshire decided to shutter one as beyond hope.
I can think of only one other Berkshire company that turned out to lack the durable competitive advantages it once appeared to have. And that company, Dexter Shoe, acquired in 1991, was not sold or divested but relocated in 2007 into Berkshire’s H. H. Brown Shoe Group, where it still resides, though on a vastly reduced scale.
True, subsidiaries might sell, as when XTRA in 2004 divested its container and intermodal businesses to refocus on leasing. But even then it appears that doing so is a managerial decision about focus rather than ruthless divestitures based on performance measures.
Compare Berkshire’s lengthy record with that of other conglomerates and they look like they play a game of musical chairs with subsidiaries, as Thorndike says distinguished his outsider CEOs.
Buying and selling has been a central part of the businesses at such companies as General Electric (e.g., Kidder Peabody, NBC Universal Pictures and the Weather Channel) and United Technologies (e.g., Hamilton Test Systems, Inmont Paint, Mostek Semiconductor, Norden System). In UT’s case, could Otis Elevator, Carrier Refrigeration, Pratt & Whitney be next?
Thorndike’s passage might have things backwards: Berkshire and Buffett are unusual because they buy-and-hold; most CEOs are happy to divest businesses whenever expedient. Certainly that is a sharp point contrasting Berkshire with GE and UT and a long list of conglomerates, LBO operators and private equity firms who do that every day.