Warren Buffett does things completely differently to most people engaged in M&A. The Helzberg Diamonds purchase illustrates this well.
After the owner of Helzberg Diamonds sent Warren Buffett the financial statements in Spring 1994 a few things struck him. First, sales had grown from $10m in 1974 to $53m in 1984 to $282m in 1994. Clearly the company was on an impressive growth path.
Second, it exhibited remarkable productivity per-store. Turning over an average of around $2m was far superior to competitors operating similar-sized stores. “If the company continues its first-rate performance - and we believe it will - it could grow rather quickly to several times its present size” Buffett told Berkshire shareholders.(1995 letter). The high sales per square foot contributed greatly to the key element Buffett looks for: good returns on invested capital.
Third, the seller, Barnett Helzberg Jr., loved the business and cared deeply about what would happen to his people and customers under a new owner. The character of the seller, including what motivates him, provides clues on whether a good deal can be struck, e.g. he’s not obsessed with accumulating money leading to hiding problems, prettifying accounts or failing to engender good morale.
Fourth, Buffett could see quality managerial leadership was supplied in the form of Jeff Comment. So, even though the patriarch was not going to be around much the managerial team would remain solid. “There was never any question in my mind that, first, Helzberg's was the kind of business that we wanted to own and, second, Jeff was our kind of manager. In fact, we would not have bought the business if Jeff had not been there to run it. Buying a retailer without good management is like buying the Eiffel Tower without an elevator.” (1995 Letter)
Buffett called Helzberg and told him that he would like to talk. He also paid what Barnett thought was the “ultimate compliment” by saying that Helzberg Diamonds was a lot like Berkshire. It wasn’t long before they met in Buffett’s Omaha office to negotiate the sale. As well as Jeff Comment, Helzberg brought along a consulting accountant who had crunched some numbers to come up with a very high price (it was supposedly based on what Buffett had paid for another company). Despite it being obviously absurd, even to Barnett, Buffett was diplomatic in choosing to show no reaction at all.
Morgan Stanley had put together a pile of material on Helzberg Diamonds, as so naturally, Barnett took a copy along to the meeting and offered it to Buffett. He declined to take it. “I’m not interested in books. I’m not interested in working with Morgan Stanley. Why do you want to sell it?” (Barnett Helzberg, Jr. (2003) “What I Learned Before I Sold to Warren Buffett: An Entrepreneurs Guide to Developing a Highly Successful Company” John Wiley & Sons).
For 10 to 15 minutes Barnett explained his need to do other things in life. This made sense to Buffett. After all, he’d witnessed similar motives in many sellers.
Buffett then asked Comment to tell him about the business and why he should buy it. Comment spoke for about an hour and half, answering a dozen questions along the way.
Who needs due diligence?
Buffett said that the deal could be “the fastest in history”. Helzberg was taken aback. How can it be done quickly? What about the time it normally takes for a buyer to carry out due diligence? He said that “most suitors demand to see every scrap of paper you’ve every generated and to interview every top manager.” Buffett’s response was that he could “smell these things. This one sme………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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