Bill Child took a 600 sq ft store with annual revenue of $250,000 to a dominant position in Utah furniture retailing with $256m turnover. For him to succeed he had to follow sound principles to gain the trust of customers and the admiration and loyalty of employees. These are useful pointers for investors: if you see this sort of combination being implemented at a company it is likely to be one with a bright future. Fortunately for us he has written about his rules for success:
When 22 year old Bill Child intended to graduate and become a teacher. Things turned out differently. He instead built a business that was sold to Warren Buffett's Berkshire Hathaway for $175m. It had a very unpromising start. However the early days imbedded the values - and hence reputation, and then to competitive advantage - which led to later success.
Bill Child, in 1951, married RC and Helen’s youngest daughter, Helen Darline (they were sweethearts from childhood). Greatly helping him in his ambition to be a teacher, Bill had recently gained a scholarship to study at the University of Utah. A few months later, when Darline was expecting a child, RC and Helen gave a small piece of land 50 yards from the 600 sq ft store for Bill and Darline to place a modular house.
Bill worked the summer at the store. Not only was he strong and worked hard, but he had a natural caring way with people, putting them at their ease, and going out of his way to serve their needs. During term time Child would work in the store evenings and on Saturday.
Here’s an indicator of the nature of the community: on many Saturday’s RC and Child would go off to the local baseball game, leaving a message on the open door “Gone to the ballgame…Come in and look around” (Benedict, Jeff (2009) How to build a business Warren Buffett would buy: the R.C. Willey story).
In spring 1954 RC felt discomfort in his stomach. Thinking he had ulcers brought on by the stress of coping with annual revenue of $250,000 with only him and Lamar Sessions as full-timers, after first trying to soldier on, he announced that he really needed a vacation to get rid of the ulcer. He booked two weeks in California and asked Sessions to keep the business going while he was away. At first Session protested there would be too much for him to do, but something RC said stunned him, “You know, Lamar, when you think you’re going to die, you’ll do most anything to prolong your life.”
Around that time Child was offered a secure job as a teacher in Syracuse junior high. All he had to do was sign the school contract and his work life was set. On Child’s graduation day (June 1, 1954) RC went to Bill and Darline’s house to explain his need for a vacation, and handed the keys to the store to Bill, asking him to oversee it while he was away.
Ominously, RC and Helen returned a week early because he was feeling too ill to continue. Then the bad news: he was diagnosed with pancreatic cancer and was unlikely to leave the hospital.
Bill Child faced a dilemma. On the one hand he could take up the teaching contract he had always wanted. On the other, there was a business that really needed him, a business that supported the family. The store had obligations to customers, suppliers and to Sessions. Perhaps the head teacher would allow him time to get the business on the right path and then he could come to the classroom?
But there was more bad news to come. First the tax man arrived at the store to conduct an audit. The 22-year old Bill hadn’t a clue as to what was happening at first. It turned out the outside accountant had not been making any tax payments, for years. Over $10,000 was due.
Then the bank called and told him to stop writing checks at once; there weren’t funds to cover them.
Then RC died on 3rd September.
After the funeral, the bank manager called a meeting with Bill and Helen to explain just how bad the finances of the business were. RC had borrowed $9,000 and the unpaid interest was mounting up. In addition, the bank had been financing credit given to customers. That finance was guaranteed by the business. It turned out that two-thirds were behind on their payments. Of those, one-half had failed to pay anything in nine months. For a business with a turnover of $250,000 and $150,000 on credit that is a lot of money to have outstanding. The bank manager wanted the store to immediately repurchase $50,000 of delinquent accounts.
The bank clearly had little faith in a 22-year old business ingénue with teaching ambitions. “Helen” the banker said, “you need to sell the business and let Bill go teach school.”
They agreed the family needed a little time to discuss what to do. Bill had only taken on the task of running the business for what he had assumed would be a short period and he had the school job lined up. Why not just sell up? But, because of all the debt, it was unlikely it would fetch a good price. Furthermore, RC had not saved any money for Helen. As profits came in he would spend it freely on his family and would give it away to needy people he met. If the business were to close his widow would have little on which to live, and no one in the family could support her. He had to turn the business around. Given the enormous goodwill it had built up over the years it still had potential.
The accidental businessman
Bill Child spoke with the school princi………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
I've been looking for investment lessons for today's investors in the analysis and approach Warren Buffett took when buying the shares in the dominant furniture and appliance retail chain in Utah. When Buffett bought it for Berkshire Hathaway, R.C. Willey commanded one-half of all furniture sales in Utah and one-third of all electrical goods sales. It has since gone on to dominate furniture and electrical goods retailing in a number of other states.
The R.C. Willey story is one of mid-western values of hard work, decency, business-smarts and devotion to community leading to outstanding success. It is the story of three men who epitomised those values: Rufus Call Willey, Bill Child and, of course, Warren Buffett.
Rufus Call (or RC) Willey sold electrical appliances in 1932 from the back of a pick-up truck in the area north of Salt Lake City, Utah. A consummate salesman he had an amazing ability to engage with people, often to sell them things they thought they didn’t need. When people in the farming communities around his home town of Syracuse said they could not afford a refrigerator he would gently suggest that they just try it for a week without charge, “and if you don’t want it after a week I’ll come back and take it out – no obligation”. Naturally, once they experienced the benefits they generally found the money from somewhere.
When competitors complained to manufacturers that RC had a competitive advantage in avoiding the overheads of a store, and therefore they should stop supplying him, RC simply built a simple 600 square foot cinder block store next to his house and stocked it with fridges, stoves and other appliances.
His 22-year old son-in-law, Bill Child, helped out in the store evenings and Saturdays when he wasn’t studying at the University of Utah in preparation to take up a teaching position in Syracuse.
When RC died suddenly in 1954 the responsibility for the tiny store landed in Bill Child’s lap. While it had a tremendous reputation with customers there was pile of debts and it was touch and go as to whether it could survive.
With tremendous resolve, ingenuity and a family pulling together, it got through. Over time, extensions were added to the single storey building. Low prices and great customer service drew customers back time and again despite being located down a side road. Then a second store was added. Eventually there were six, all in Utah. By 1995 annual revenue was over $250m, profits and return on capital was great and there was little debt.
Bill Child, at 63, looked to secure the future of the enterprise beyond his tenure as CEO. Remembering that RC had died at a much younger age, he was concerned that his own death might result in enormous taxes to be paid which the family would only be able to afford by selling a large portion of their shares. A much better solution was to swap those R.C. Willey shares for Berkshire Hathaway shares. Not only would the tax burden be better managed, but the team and its unique ethos would be preserved.
Warren Buffett could see the values he most admired lodged in Child. He wrote, “Bill Child represents the best of America. In matters of family, philanthropy, business, or just plain citizenship, anyone who follows in his footsteps is heading true north…By doing the right things for his customers and associates, he eventually left once-strong competitors in the dust…He just applied the oldest and soundest principle ever set forth: Treat the other fellow as you would like to be treated yourself” (Warren Buffett’s foreword to Benedict, Jeff (2009) How to build a business Warren Buffett would buy: the R.C. Willey story).
Buffett advises us to examine the lessons from Child’s life and apply them to our own, to lead a happier, more productive life. This short series of newsletters describes those lessons and values, and why Buffett was more than willing to pay $175m for the company.
Rufus Call Willey
Rufus Call, born in 1900 in Syracuse, 25 north of………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
The seller of Helzberg Diamonds, Barnett Helzberg was very pleased that it found a home within the Berkshire Hathaway family. He was able to step back from the business and devote more time to his family and philanthropic pursuits. The family were diversified now with a large holding in Berkshire which gained income from a broad spread of business sectors; and they could sell the highly liquid Berkshire shares at any time to diversify further.
Most importantly, the future of the company was in good hands. There was a solemn commitment from Buffett and Munger to continue the firm’s business philosophy, to retain the current associates and to maintain the corporate HQ in the Kansas City area.
Jeff Comment, CEO, expected his new boss to give him some instructions. Buffett did indeed ring him up the day after the sale (May 1, 1995), but all he said was “Guess what you get to do today. Start breaking all your banking relationships, because from now on I’m your bank.” (Jeff Comment in an interview with Robert P. Miles in The Warren Buffett CEO (2002) John Wiley).
Thus Buffett required control of capital allocation across the group. But apart from that, Comment was free to manage the business how he thought best “Berkshire hasn’t asked me to do anything that’s really changed the business”.
He told the Kansas City Star paper that Buffett had said that he doesn’t call his presidents but “I like hearing from you guys once in a while.”
Jeff Comment says that Buffett and he are very different people, but they really trust one another, and have a high degree of mutual respect. He thinks that is the case with all of Buffett managers, there is a sort of chemistry. “That chemistry is missing in a lot of businesses today. They’re functional, they’re tactically correct, but boy do you lose the passion, and you lose the love of the business. That doesn’t happen here…Warren is an incredibly cordial, warm, personable person.” (Bob Miles's book)
Why not put Borsheims and Helzberg together?
Most business groups already holding a jewellery retailer then adding another would instinctively look for “synergy”, such as buying economies or rationalising the store estate. They would put them under the same management. But Berkshire is no ordinary group.
First, Buffett had promised that the businesses would be largely autonomous, each with their distinctive cultures and leaderships.
Second the synergistic gains would be pretty small compared with the loss of focus, damage to the esprit de corps and confusion over strategy. On the latter point Buffett wrote in his 1995 letter that “Helzberg's…is an entirely different sort of operation from Borsheim's, our Omaha jewellery business, and the two companies will operate independently of each other.”
He expanded on that thought in at the Meeting in May 1996, “Both [Borsheims and Nebraska Furniture Mart] offer this incredible selection, low prices brought about by huge volume, low operating costs, and all of that. Operating multiple locations…you would lose something, in terms of the amount of selection that could be offered. There’s $50 million-plus at retail of jewellery at Borsheims’ one location. Well, when someone wants to buy a ring, or a pearl necklace, or something of the sort, they can see more offerings at a place like that than they possibly could at somebody who i………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Buffett and Munger do discounted cash flow (owner earnings) calculations in their head - never on paper or computer
When asked at the Annual Meeting in May 1996 for detail on his discounting method, for example, how many future years does he extend the calculation to, Buffett explained that, yes, the discounted owner earnings is the framework at the heart of investing or buying businesses, but, no, there are no written down calculations at Berkshire with cut-off dates for calculating what is called in “the terminal value”.
He said that though the equation is simple and direct “we’ve never actually sat down and written out a set of numbers to relate that equation. We do it in our heads, in a way, obviously. I mean, that’s what it’s all about. But there is no piece of paper. There never was a piece of paper that shows what our calculation on Helzberg’s or See’s Candy or The Buffalo News was, in that respect.”
Buffett and Munger fear that people get hung up on the illusory appearance of “scientific” quality when using apparently sophisticated numerical analysis. In reality, inputs to the formula are of an imprecise nature.
What you need are good ballpark estimates after taking on board the all-important qualitative factors that create shareholder value (quality of franchise and management).
“We are sitting in the office thinking about that question with each business or each investment. And we have discount rates, in a general way, in mind. But we really like the decision to be obvious enough to us that it doesn’t require making a detailed calculation. It’s the frame
Does Warren Buffett’s recent positioning of Berkshire Hathaway tell us something about his views on the future?
Since Covid-19 struck Warren Buffett has been active in selling a number of long-held shares and in spending billions purchasing stakes in other companies. I’m going to speculate about his motivations.
First, the cash holdings
Berkshire’s cash and cash equivalents rose over the first six months of the year from $125bn to a massive $142.8bn, most of which is in U.S. Treasury Bills earning a tiny interest rate.
By contrast, investments in market-listed equity and fixed maturity securities fell to $226.7 billion from $266.7bn in December. In June $207.5bn was in equities and $19.2bn in fixed income.
Most of this reduction is due to price declines, but some is because of decisions to sell equities. Net sales in the second quarter were $12.8bn.
Apart from the $207.5bn invested in minority stakes in stock market listed companies Berkshire owns 100%, or near 100%, of dozens of companies from See’s Candy to BNSF and National Indemnity. If these were floated on the stock market such a group would command a market capitalisation - I guess, very approximately - of $400bn.
Even allowing for both types of equity holdings, the cash pile is large relative to the amount Berkshire has invested in equities. It is the largest amount of net cash Berkshire has ever had. Indeed, it’s one of the largest cash balances any company has ever had.
So, to my first speculative conclusion
Warren Buffett is worried about the course of the US and the world economies and so holds cash in reserve firstly, as a precaution, “We don’t want to be dependent on the kindness of strangers, or friends even, because there are times when money almost stops”, he said at this year’s AGM.
Buffett does not call market tops and bottoms. He merely continually looks for good investments at reasonable prices. Sometimes there are few to be found (which – not entirely coincidentally - often occurs near market tops), and so cash piles up.
Naturally, an assessment of the economic future feeds into the assessment of what is a reasonable price to pay for a company’s future flows. Thus, the prospect of severe economic disruption affects first a judgement of fair value for equity assets, and then into the accumulation of cash.
Cash also opens up opportunities in those times when others are selling assets on the cheap: “We have $120bn in Treasury bills and some in cash, paying virtually nothing – a terrible investment over time. But they are the one thing that when opportunity arises, maybe the only thing you can look to pay for those opportunities is the Treasury bills.” (Warren Buffett, speaking at this year’s virtual AGM)
Is there anything else to back up that conclusion?
What about what he said after selling all of shares Berkshire held in the four largest airlines earlier this year, raising $6bn?
He noted that the world had changed for the airlines, “there are certain industries – the airline industry among others – that are really hurt by a forced shutdown.” (Berkshire’s AGM)
The airline shares were sold despite Berkshire having to record a loss on their sale, having paid $7 – 8bn.
Paying so much made sense when you expected Berkshire’s share of the earnings of those companies to total $1bn per year, “We felt that we were getting a billion, roughly, of earnings in a year – our share of underlying earnings was about $1bn. We thought that number was more likely to go up than down over a period of time.” (AGM)
He no longer expects a billion of earnings, not for many years at least: “I don’t know whether 2-3 years from now as many people will flying as many passenger miles as they did last year. They may, or they may not. But the future is much less clear to me on how the business will turn out…The airline business has the problem that if the business comes back 70% or 80% it has a problem that the aircraft don’t disappear. So, you’ve got too many planes. (AGM)
It's better to have $6bn in cash available to cope with the possibility of dire economic conditions and for buying opportunities than to have it in assets producing much poorer returns on capital than first envisaged.
What about the sales of US bank shares?
Buffett has been busy spring cleaning of bank stocks corner. At the beginning of the year Berkshire held $8.4bn in JP Morgan Chase. About two-thirds have been sold, and the shares have fallen from $139 to $101, so the value of its holding is now only about $2.3bn
Wells Fargo shares worth $18.6bn on Berkshire’s balance sheet in December (when BH held 8.4% of the bank) are now down to $6bn after selling off 108m shares (out of 346m) and the share price halving from around $54 to $25.
All the Goldman Sachs shares held in ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Profits from the Berkshire Hathaway's Shoe Group jumped from $28.8m in 1993 to $55.8m in 1994 with about nine-tenths of the increase down to Dexter coming into the fold. And Buffett and Munger were looking forward to 1995, “Management was pleased with Dexter's 1994 performance and better results are anticipated during 1995. This optimism results from the fact that recent wholesale price adjustments should help mitigate the effects of prior years' increases in Dexter's costs. Additionally, operating efficiencies are anticipated in connection with the start-up of Dexter's new computerized distribution center and from advanced manufacturing technologies.” (1994 Letter)
But rather than profits moving up another notch they fell, down to $37.5m. Buffett put a brave face on it, pointing to the even worse performance of other US manufacturers. “Our shoe business operated in an industry that suffered depressed earnings throughout last year, and many of our competitors made only marginal profits or worse. That means we at least maintained, and in some instances widened, our competitive superiority.” (1995 Letter)
And he looked forward to a “climb back to top-grade earnings” in 1996 as the managers capitalised on opportunities resulting from loss-making competitors closing and lowered production and administration costs.
He asked Berkshire shareholders to view the 1995 result as a “cyclical” problem – just a bad year in a cycle of good and bad - and not as a “secular” one, a long term trend.
He was right, to some extent, as profit crawled up to $41m in in 1996; the managers exploited a slightly improved marketing environment and had indeed cut costs. Buffett anticipated further operating profit increases during 1997.
But it wasn’t to be, the trend was very much secular for Dexter, after all. Profits fell to $32.2m in 1997 and operating profit margin to 7.4% on revenues down by $18.9m to $542m.
Dexter was now clearly identified by Buffett in the annual report as the problem area. Its sales were down about 12% in one year. But, nevertheless, Dexter’s management were “repositioning its brand to be more competitive in a highly discount oriented retail environment.” (1997 Letter). Berkshire’s shareholders were told that Dexter’s managers anticipate a recovery of a substantial portion of the lost volume in 1998.
After waiting another year shareholders were shocked to discover shoe profits to be down yet again. They were now less than half those of 1994, at $23m from sales of only $500m “The unfavorable results represent a continuation of a trend which began three years ago. Manufacturers such as Brown, Lowell and Dexter are facing reduced demand for their products. Additionally, major retailers are offering promotions to generate sales which is resulting in an ongoing margin squeeze.” (1998 Letter)
Still Buffett gave the benefit of doubt to the people running these operations, saying they are working to align production activity to the reduced sales level. Hopefully their genius at an operational level will cause profits will rise to a satisfactory level.
Despite their efforts, 1999 was dreadful. Profits halved again, to £11m on turnover down another $2m. Buffett noted that all businesses in the Berkshire stable had “excellent results in 1999” except Dexter.
He identified the problem not as one of managerial capability. Dexter’s managers were every bit the equal of the other Berkshire’s managers in terms of “skills, energy and devotion”. No, the core of the issue was that “we manufacture shoes primarily in the U.S., and it has become extremely difficult for domestic producers to compete effectively. In 1999, approximately 93% of the 1.3 billion pairs of shoes purchased in this country came from abroad, where extremely low-cost labor is the rule.” (1999 Letter) Thus, the issue was strategic; Dexter lacked competitive advantage to contest overseas producers.
Belatedly, the reluctance of The Shoe Group to manufacture a significant proportion of output in low-cost countries dissolved. “We have loyal, highly-skilled workers in our U.S. plants, and we want to retain every job here that we can. Nevertheless, in order to remain viable, we are sourcing more of our output internationally” Buffett wrote in his 1999 letter. Some US plants were closed in 1999 and the Group had to bear the costs of severance and relocation.
Buffett is not perfect
In 2000 all the remaining goodwill attributable to Dexter was written off and more factories were closed, with others scheduled to close in 2001. Buffett took the blame on himself for the tragedy. His mea culpa drew attention to mistakes across his career, “We try…to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners. Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.” (2000 Letter)
He was being far too hard on himself. While there were errors in these areas, we know, firstly, that successes elsewhere far out-weigh those mistakes. Second, resources from Blue Chip Stamps, Berkshire’s textile business and Diversified Retailing were taken from unproductive areas and reallocated to highly profitable investments in other industries such as candy (See’s Candy), insurance (e.g. National Indemnity) and in stock market listed shares such as Capital Cities and Coca-Cola which went on to multiply 6- or 20-fold.
What Buffett was doing in dwelling on mistakes was impressing on himself and others the need to remember the logic.……………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Today I'll describe how Warren Buffett got into his worst investing mistake, and tomorrow I'll cover the tragedy that started to unfold almost immediately after buying.
Harold Alfond, the son of blue-collar Russian-Jewish immigrants, worked his way up from 25c an hour shop floor work making shoes in the Depression to factory superintendent. Then, aged 25, in 1939, he picked up a hitchhiker when driving to the county fair in Maine. In passing, the hitchhiker mentioned an idle shoe factory in nearby Norridgewock. Intrigued, Alfond skipped the fair to look over the factory. He wanted it but didn’t have the $1,000 asking price.
However, a year later he sold his car and partnered with his father to buy it. That $1,000 was turned into $1.1m when in 1944 the Norrwock Shoe Company was sold to rival for $1.1m.
In 1956 Alfond put down a bet ten times as large as the one when he was 26 by creating another shoe company and spending $10,000 buying an abandoned wool factory in his hometown of Dexter, Maine. His right-hand man was to become his nephew Peter Lunder, who joined in 1958.
At first, The Dexter Shoe Company concentrated on making own-label shoes for department stores such as Sears, JC Penny and Montgomery Ward. But in 1962 Alfond, Lunder and the team developed the Dexter brand, signifying “reasonably priced” shoes for men and women but with some style. Dexter was aiming at the volume market. With the help of crack sales and marketing team these shoes were sold to independent stores all over the US.
The innovation of the 1980s was the purchase of malls along highways in New England. Dexter turned these into factory outlet malls selling seconds and discontinued lines. The company would take some space for their own shoes - the units looked like log-cabins - and rent out units to other manufacturers. By 1990 Dexter owned more than 80 factory outlets, employed 4,000 employees and annually turned over $250m selling 7.5m pairs of shoes.
By then it had branched out into moccasins, boat, golf and athletic shoes.
The deal to buy Dexter
In early 1993 Buffett was excited by the way Frank Rooney and Jim Issler were managing “superbly-run” H. H. Brown (bought for Berkshire in 1991), “a real winner…expectations have been considerably exceeded” (Buffett's 1993 letter to shareholders)
Confidence was boosted further when Rooney and Issler deftly did some “fixing” at Lowell shoes (bought 1992) and again surpassed Buffett’s hopes.
So, when Rooney suggested to Buffett that Dexter would fit well in The Shoe Group and that he should meet his old friends Alfond and Lunder to discuss buying it Buffett jumped at the chance.
An airport in West Palm Beach, Florida was the chosen location. “We went to some little restaura………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
(From the third volume of The Deals of Warren Buffett - to be published next year (I've only written 4 of the 11 chapters so far))
Lowell Shoe Inc. was the second firm to go into Berkshire Hathaway's Shoe Group. Warren Buffett was encouraged to buy it because he had witnessed the first shoe company bought, H. H. Brown, performing well in the the six months after purchase on July 1, 1991. Turnover was $104m and after-tax earnings $8.6m. Then in its first full year under Berkshire’s ownership it earned $17.3m on revenue of $215m, a nice steady increase and a decent income on the $161m laid out. Rooney and Buffett made their move to create The Shoe Group on the penultimate day of 1992 by acquiring Lowell Shoe Company for $46.2m.
This act is an example of a Berkshire Hathaway principle: subsidiaries are encouraged to make small “add-on” acquisitions if at least a dollar of value is created for each dollar spent. Such actions could be used to extend product offerings or distribution capabilities. “In this manner, we enlarge the domain of managers we already know to be outstanding - and that's a low-risk and high-return proposition.” (1992 Letter)
Lowell, also located in New England but with one of its manufacturing plant in Puerto Rico, had a niche business supplying nurses (and some doctors) with shoes. “Nurse Mates” are anti-slip, light-weight and comfortable with their broad heel. With a reputation established over many decades most US nurses today wear Nurse Mates or shoes from their rival Dansko. Turnover in 1992 was $90m. This was boosted by the sale of other kinds of women’s shoes, but the reputational competitive advantage lay with nurses’ shoes (Lowell was later renamed Söfft Shoe Company).
Buffett joked about a limitation on potential candidates for acquisition: “a trend has emerged that may make further acquisitions difficult. The parent company made one purchase in 1991, buying H. H. Brown,
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
When the creator of the specialist boots and shoes company H. H. Brown died in December 1990 aged 92 his family concluded that it was best if the company were sold. Frank Rooney, CEO and son-in-law, took up the task of finding a buyer with the help of Goldman Sachs and their pack of material to give to potential buyers.
But real progress began on the golf course. A long-time friend of Buffett, John Loomis, was out on the links in Florida in Spring 1991 playing against Frank Rooney. The conversation turned to the sale of H. H. Brown. Immediately Loomis thought the company a good fit for Berkshire Hathaway, “John told Frank that the company should be right up Berkshire's alley, and Frank promptly gave me a call”, Buffett recounts in his 1991 letter.
The conversation went well. According to Rooney, “Warren said ‘Well, that sounds interesting. Don’t send me any of that stuff from Goldman Sachs, just send me the audited numbers for the last couple of years.’” (Frank Rooney interviewed by Robert P. Miles for “The Warren Buffett CEO; Secrets from the Berkshire Hathaway Managers”). Buffett came away from the call thinking “that they would make a deal”.
Rooney sent the accounts and they agreed to meet in New York. At lunch, Buffett asked Rooney and his brother-in-law whether, if Berkshire agreed to their asking price, they would stop talking to other potential buyers. “I said ‘Yes’ and he said, ‘Okay, we got a deal.’ So my brother-in-law and I took a walk around the block and came back and said, ‘Okay, that’s it.’” (Book: The Warren Buffett CEO)
Rooney was astonished that Buffett had agreed without having yet seen a factory or met any of the H. H. Brown people. “Why the hell did he buy a shoe company? I asked him later, and he said…‘because of you’”. Berkshire paid $161m cash for 100% of H. H. Brown shares July 1, 1991.
Apart from the proven earnings (around $25m before tax, $15m after tax) there were three key reasons why Buffett wanted H. H. Brown, each linked directly to the likelihood of the profits continuing to rise:
Prof. Glen Arnold
I'm a full-time investor running my portfolio from peaceful Leicestershire countryside. I also happen to be UK´s best selling investment book author and a Financial Times Best selling author.
Originally, I wrote all my ideas out in full on this website. Now that ADVFN publish them they are entitled to display the full version for six months – you can see them here. Thus can I only post the first few paragraphs here for anything younger than six months.
I write 2 to 3 newsletters per week - investing is about making the right decisions, not many decisions.