Wednesday, May 22, 2013

DealBook Question Already Answered on

 Another day, another “Is Warren Buffett is Irreplaceable?” article. 
 Today’s version, however, carries the imprimatur of the New York Times’ “DealBook” column, and it’s written by a professor to boot. 
 The gist of the professor’s case appears right in the first two paragraphs, as follows:
 Acquisitions usually come with a nice premium for the seller. But when Warren E. Buffett is the buyer, there is typically something of a discount.
 The ability to make acquisitions on favorable terms is a testament to Mr. Buffett’s personality and skills as a deal maker. It also highlights an almost unsolvable problem for his company, Berkshire Hathaway, and its shareholders. When its 82-year-old chief executive is gone, who will negotiate such sweet deals?
 Exhibit A in the ensuing story is the recent Heinz deal, terms of which the professor parses in order to make the point that Buffett got a “really tasty” deal when considering the expense of the 9% preferred stock issued to Berkshire relative to the 4.25% yield on debt issued to help fund the balance of the acquisition:
  Mr. Buffett is getting 55 percent of Heinz plus an interest payment of $700 million a year. This is an extraordinarily good deal.
 Furthermore, the professor points out, the fact that “The Heinz board decided to deal only with Berkshire” fits the pattern established during the Burlington Northern and Lubrizol deals, where “neither board appeared to negotiate particularly hard.”
 Thus, he concludes, “When it comes to Mr. Buffett, boards roll over.”
 The analysis, however, leaves aside a few important facts.
 Fact one is that Berkshire (and its partner in the Heinz deal, 3G) is paying an all-time high price for Heinz stock since it was founded in 1869.
 Fact two is that no strategic buyer expressed any interest at all in outbidding Berkshire and 3G for Heinz.
 And the reason nobody else stepped in is that Berkshire and 3G are paying an extremely high multiple for Heinz—14.3-times EBITDA (a metric Buffett distrusts) and 17.4X pre-tax, pre-interest income, his preferred valuation measure. 
 In fact, Buffett said at the recent shareholder meeting, “Charlie and I paid probably a little more than we would have if we’d bought it ourselves,” without 3G, who will run it.
 So the Heinz deal is hardly a steal—and if it were, surely any number of strategic buyers or Carl Icahn-types would have jumped into the fray to push up the price.  (Witness the current bidding war for Sprint, which has an enterprise value of $39 billion, compared to Heinz at $27 billion.)
 As for the Burlington and Lubrizol boards “rolling over” for Buffett during their negotiations, well, again, the facts disagree with the superficial observation: Berkshire paid a record all-time high price for Lubrizol (specifically, $135 a share for a stock that had traded at $23.75 less than 24 months prior to the deal announcement).
 And in the case of Burlington Northern Santa Fe, a Class 1 railroad with almost no alternative bidder who could even theoretically buy the company, Buffett paid $100 a share for a stock that had traded above $100 a share for less than five months out of its 160 year history (during the housing bubble, just prior to the financial crisis).  Just seven months before Berkshire’s bid the stock had touched $50.73 a share, and the day prior to the announcement it was $75.87
 Oh, and Berkshire offered either cash or stock for Burlington’s shares, so whatever the Burlington board was theoretically leaving on the table by not soliciting somebody else—and who else could have  topped Berkshire’s $35 billion bid in those dark days is a topic the professor does not address—will accrue to those Burlington shareholders who took Berkshire stock instead of cold, hard cash.
 There is one other major factor outside price and availability of other suitors that explains the ability of Buffett to court companies, and it is a big one not discussed in the DealBook article: Berkshire does not mess with the companies it buys.
 Unlike most acquirers, who promise their Wall Street investors zillions of dollars in synergies (i.e. layoffs and plant closures) resulting in all manner of earnings accretion, Buffett leaves his companies alone, and that is a tangible benefit which any board of directors ought to consider when deciding what should happen to the assets for which they are a fiduciary.
 In the case of Burlington Northern, for example, the ability to invest for growth, without the need to meet Wall Street forecasts, as part of Berkshire Hathaway has allowed the railroad to take advantage of a shale oil boom that has helped boost revenues by 40% and pre-tax earnings by 50% since the day the deal closed.
 And that is good for not just the Burlington Northern railroad, and for Berkshire Hathaway, and for Warren is good for the Burlington Northern shareholders who chose to take Berkshire stock, a key point missing from the DealBook analysis.
 As for the question asked by DealBook, “When its 82-year-old chief executive is gone, who will negotiate such sweet deals?” the answer is:
 a) there’s a guy; 
 b) he’s already getting the same kinds of deals Warren Buffett is getting, and;

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is and Why It Matters”
(eBooks on Investing, 2013)    Available now at

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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


BobE said...

BNSF's board asked Buffett for $110 and he said his offer was $100.

I can't find a link quickly to substantiate this, but it was written about in Trains Magazine by an author with impeccable sourcing. I edited his piece before it went in to the issue.

Anyhow, if you'd like to say that the board didn't negotiate or just rolled over for Big Buff, go ahead. However, they did ask for more, were rebuffed and realized they lacked an alternative buyer to play against Warren and took his deal.

David Merkel said...

You got this one right, not Dealbook.

Jeff Matthews said...
This comment has been removed by the author.
Anonymous said...

Jeff I really enjoy your blog. I know this is not the right forum to post this question but I could not find an email to get in touch with your directly. I am independent investor with value as my main criteria. My 15 and 17 year old sons have expressed an interest in the markets and I have involved them in my investment decisions in several ways. My question is any thoughts on a book for kids this age to read on investing that would catch their attention and not put them to sleep. Thanks. Bill.

Jeff Matthews said...

This is as good a forum as any, and readers may want to chime in...I'd say:
1. Any of the John Train "Money Masters" books, because everybody has their own insights on making money;
2. The Jesse Livermore sort-of-biography "Reminiscences of a Stock Operator" for a lot of great lessons on investing, including how everything has all been seen before (probably the best single investment book ever written, IMO);
3. Jim Cramer's "Street Addict" for a great depiction of what running a hedge fund in the '90s was like (not pretty, but it's a great book);
4. Ben Graham's "Intelligent Investor" is not as much fun as Cramer's but they'll get to it eventually;
5. Roger Lowenstein's bio of Buffett, "Making of an American Capitalist" is the best of the Buffett books because Roger was highly informed by Buffett very early on in his life...and if they want a shorter Buffett book, "Secrets in Plain Sight," by somebody whose name escapes me, covers the Buffett bases and tries to make it fun.

Other suggestions welcome, I'm leaving many out, but these are the fun ones.


Jeff Matthews said...

And thanks to "Bob E" for pointing out that there really was no alternative to Berkshire's bid for BNSF. This is why professors teach, they don't run companies.


BobE said...

Thanks Jeff. My use of the word "you" in the initial post was aimed at the Dealbook guy. Re-reading the post today (while looking for a comment on the utility deal!) I noticed my imprecise language.

Jeff Matthews said...

Thank you, Bob...I did initially read it the wrong way, and my initial response, which I later took down, was aimed at that.

Anonymous said...

Jeff, should we consider Tracy Britt as the possible Buffett's successor?

Jeff Matthews said...

I have not met Tracy Britt, but given her short tenure at Berkshire and lack of investing and operating experience (no knock on her--she's just young and inexperienced), she could not possibly be in the line-up. Of course, anything can happen, and in a decade or (Buffett can be around a long time), she may well become a candidate.

But she does not help herself by getting her photo in the Wall Street Journal. "Whom the Gods destroy they first make glamorous" is a Wall Street saying that rings in my ears when I see stuff like that.

Look at David Sokol.


David Cooper said...

Jeff do think Obama is holding up the KEystone pipeline as some sort of payback for Buffett's support of his presidency. Isn't BNSF one of the biggest winners due to a lack of the keystone pipeline. With all due respect Buffett is the greatest investor of all time but as person it doesn't jibe with his"billionaire next door" image. Is he a crony capitalist who would cut your throat out for a nickel? I ask you because who seem to know the inner workers better than anybody else. Thanks for your writing this blog, I find you and the commentators really interesting.

Jeff Matthews said...

Buffett supported Obama early on, well before Bakken shale oil became a clear bonus to the BNSF deal. And BNSF will grow without it.
Anyway, if Obama is holding up Keystone to make the world's richest man become a little richer, you'll never see it in print.