Berkshire Beyond Buffett

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Origins

In 1956, a twenty-six-year-old Warren Buffett formed Buffett Partnership Ltd., an investment firm run from his native Omaha. His philosophy was to find companies priced below book value; such bargain opportunities were common then and yielded gains, though several failed eventually because they lacked durable competitive advantages. One of those companies, of which Buffett took control in 1965, was Berkshire Hathaway, Inc.

At the time of its acquisition, Berkshire Hathaway was a New England textile manufacturer. It was the product of a 1955 merger between two companies with late-nineteenth-century origins—Berkshire Fine Spinning Associates, a 1929 amalgamation of textile companies, including Berkshire Cotton Manufacturing Company, founded in 1889, and Hathaway Manufacturing, dating to 1888. Via the 1955 merger, control of Berkshire Hathaway was shared by two families, the Chaces and the Stantons, who had owned its constituents for generations.

These companies had once been distinguished textile manufacturers, but they battled competitive onslaughts, largely due to cheaper labor costs, first in the southern United States and later from abroad. Berkshire Hathaway survived by cutting costs, including closing facilities and laying off workers. The Stantons, especially brothers Otis and Seabury, bickered among themselves and feuded with the Chaces over strategy, such as how much to reinvest in an ailing business. Its thinly traded stock sold at one third to one half of book value; in 1965, book value was $19.24 per share, or $22 million for the whole company.

Buffett first heard of Berkshire a decade earlier while working for his mentor, Benjamin Graham, at the Graham-Newman investment firm. Buffett had acquired a personal stake in Berkshire Hathaway in 1962, and brokers alerted him of opportunities to buy larger blocks at prices below $8 per share. Berkshire periodically repurchased shares, and Buffett figured he could buy a block of these discounted shares and cash out at a higher price when Berkshire was repurchasing. At a time when the stock traded at less than $10, Seabury Stanton asked what Buffett would sell his block for; Buffett said $11.50. Seabury sought Buffett’s promise to tender if the company made such an offer, and Buffett agreed. Thinking they had a deal, Buffett ceased acquiring shares. So when the company shortly thereafter offered $11.38, Buffett thought he was being chiseled.

In response, Buffett turned the tables, bought more shares, and persuaded Otis Stanton and eventually Seabury Stanton to sell to him as well. At that point, Buffett decided to become better acquainted with his investment. He visited Berkshire’s mills, toured the plant, and interviewed managers—conventional exercises for business buyers, but something Buffett would rarely repeat in his career. Buffett learned about textile manufacturing and came to admire the talents of his tour guide, vice-president of manufacturing Kenneth V. Chace (whose last name is coincidental; he was not related to the family owners). Once the Buffett Partnership gained a controlling interest in Berkshire stock, the Stantons resigned from management. Buffett was elected a director, and the board named Ken Chace president.

The local press portrayed Buffett’s acquisition of Berkshire Hathaway as a hostile bid, stoking rumors that he was a takeover artist prepared to hasten the liquidation of the struggling company. Buffett recoiled at having a reputation as a liquidator and took pains to avoid acting like one. Yet Berkshire’s textile operations continued to decline for years as the forces of globalization hammered the industry. Rivals moved manufacturing abroad, where labor costs were low and export shipping cheap, thanks to increasingly versatile intermodal containers. Even with corporate belt tightening and tolerating losses for shareholders, Berkshire was forced to gradually curtail operations through the 1970s, with Buffett finally shuttering the mills for good in 1985.

Buffett’s acquisition of Berkshire was a great learning experience for him—learning what not to do. From then on, he made it Berkshire policy never to engage in hostile takeovers and vowed never to liquidate an acquired subsidiary. As a rule, Berkshire would acquire only companies with top management in place, to avoid having to arrange managerial shuffles. Above all, Berkshire would seek businesses with long-term economic value and willingly pay a fair price for them. The anguish of closing the textile business forged Buffett’s commitment to permanence. During the mid-1980s, Berkshire would divest a few other failing businesses the Buffett Partnership had initially acquired—such as the department store chains Diversified Retailing, Associated Retail Stores, and Hochshild Kohn—but thereafter foreswore doing so.

Buffett says he would have been far better off had he never heard of Berkshire Hathaway. But the lessons learned from that first acquisition put an indelible stamp on what the company would become.