DealBook Question Already Answered on Amazon.com
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 Buffett…it 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;
c) his name is in this book: “Warren Buffett’s Successor: Who It Is and Why It Matters” (eBooks on Investing, 2013).
Author “Warren Buffett’s Successor: Who It Is and Why It Matters”
(eBooks on Investing, 2013) Available now at Amazon.com
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