> 2,500 BH Media, CTB, FlightSafety, Garan, Nebraska Furniture Mart, Richline, See’s, TTI
> 1,000 NICO and a dozen non-insurance subsidiaries
< 1,000 A further dozen non-insurance subsidiaries; all other insurance subsidiaries
The costliest mistake was a replay of the original Berkshire Hathaway deal, this time involving a New England shoe company. Founded by Harold Alfond in 1956 in Dexter, Maine, with a stake of $10,000, Dexter Shoe became a dynamo, producing millions of shoes in local factories annually. It built a niche in the golf shoe market and won awards from department store customers for excellence among suppliers. Dexter maintained production in the United States, paying higher wages than rivals and seemed to outdo competing imports from low-wage countries in terms of quality and style.
In 1993, Berkshire acquired Dexter for $443 million, all in Berkshire stock. It had positive traits seen in other early Berkshire acquisitions—an entrepreneurial founding family akin to See’s, a budget consciousness akin to Wesco—as well as solid branding, distribution, and customer relations. But Dexter also had one latent negative trait identical to that of Berkshire Hathaway’s textile operations: manufacturing plants in the U.S. with costs ten times those in China. Eventually, rivals would produce shoes as good as Dexter’s but at one-tenth the cost. By 2007, Buffett confessed that acquiring Dexter was the worst deal he ever made.7
At that point, Berkshire transferred Dexter’s business to H.H. Brown Shoe Company, a prosperous footwear subsidiary acquired in 1990. Also of New England bloodlines, H.H. Brown dates to 1883, when Henry H. Brown founded the company in Natick, Massachusetts, then a center of the nation’s shoemaking industry. In 1927, Brown sold the company for $10,000 to Ray Heffernan, a twenty-nine-year-old who ran it until he died at the age of ninety-two in 1990.8
Heffernan grew the business steadily over the years, making acquisitions and pioneering many product innovations, including the use of Gore-Tex in shoe linings. By 1990, the company ran four plants, all in North America, employed three thousand people, and grossed $25 million annually.9 As Heffernan’s health declined, leadership of H.H. Brown fell to his son-in-law, Frank Rooney, long-time CEO of a rival shoe company.10 After Heffernan died, the family wished to sell. During a golf game, Rooney mentioned this desire to John Loomis, a friend of Buffett and a Berkshire shareholder, who told Rooney to call Buffett.11 A deal was quickly made for Berkshire to acquire H.H. Brown for $161 million. Buffett persuaded Rooney to stay on, which was important to Berkshire, as it had given up recruiting subsidiary managers.
H.H. Brown was the leading U.S. maker of work shoes and boots and had a proven record of profitability. The company produces its premium brand shoes in the United States, charging higher prices to recoup costs, while making standard brands more cheaply overseas. Brown also sells military boots through the post exchanges on U.S. military bases, benefiting from federal “buy American” laws, and makes work boots for laborers required to wear them by the federal Occupational Safety and Health Administration. Brown thus managed to survive—and thrive—by a combination of tradition and adaptation that had eluded Dexter.
Aside from illustrating the diversity of Berkshire operations, even within a single line of business, what is remarkable about the Dexter and Brown story is the ending. Berkshire did not sell Dexter but repurposed it in H.H. Brown. Brown then closed Dexter’s U.S. operations, relocated them abroad, enabling the Dexter brand to endure.
Berkshire acquired its subsidiaries over a span of fifty years (see table 2.5). Its smaller acquisitions—the Buffalo News, See’s, Wesco, Fechheimer—tended to occur in the earlier decades, whereas the largest have occurred more recently. As its capital resources have grown, Berkshire has increasingly put a premium on identifying larger acquisitions. But large acquisitions remain scarce, and a larger number of smaller acquisitions can often be more profitable than holding cash or government securities for long periods.
It is commonly believed that Berkshire’s acquisitions target privately held companies. While that is true, looking at the number of private companies acquired, the total dollars paid in public company deals (more than $100 billion) exceeds that paid in private-company deals. In half of the acquired public companies, however, a large percentage of the stock was owned by single families, and at least some family members served as directors or officers (see table 2.6).
Most Berkshire acquisitions start and end with Berkshire owning 100 percent of the selling company’s shares. But in several cases, Berkshire’s ownership position begins small and grows to 100 percent. Examples include Burlington Northern Santa Fe Railway, GEICO, and Blue Chip Stamps. In several cases, as with the Heldmans at Fechheimer, selling shareholders retained a portion on an indefinite or permanent basis.12 In yet other deals, Berkshire’s initial position was less than 100 percent, but plans were agreed for it to acquire the rest in due course.13