Berkshire Beyond Buffett(4)

If the See’s acquisition involved paying a price below value, the opposite occurred in the second acquisition of the trio that spawned Berkshire culture. During 1972 and 1973, Blue Chip acquired 8 percent of Wesco Financial Corporation, a company Munger’s partnership had invested in. Based in Pasadena, Wesco was founded by the Casper family. Its principal business was a mutual savings and loan association, which catered to military veterans and thrived because of a commitment to low cost. In 1973, Wesco management proposed to merge it into Financial Corporation of Santa Barbara (FCSB), with Wesco stockholders receiving FCSB shares. Wesco stockholders disagreed over the adequacy of the FCSB shares they were to receive. Buffett and Munger believed that Wesco shares were undervalued and that FCSB’s were overvalued. They therefore opposed the merger.

Munger proposed buying enough Wesco shares to block the deal, whereas Buffett thought they should simply accept their losses. Instead of doing either, Munger beseeched Wesco’s chief executive, Louis R. Vincenti, to abort the merger. Munger indicated that Blue Chip would be interested in acquiring Wesco, but Vincenti advised that the question was for Wesco shareholders, not for him. So Buffett met with Elizabeth (“Betty”) Casper Peters, a large shareholder and head of the family bloc. He explained the potential benefits of ownership by Blue Chip, including intangibles, especially a shared orientation as co-owners. Peters, who was eager to see the family business grow, backed the decision to pull the plug on the merger.

The merger did not go through, and Wesco’s stock price dropped, as typically happens in such a scenario, from a high of $18 to $11. Blue Chip could then have begun acquiring shares at the low market price that Buffett and Munger’s scuttling of the merger had engendered. Although they wished to acquire Wesco, they did not think it would be fair to pay the low market price after their interference with the merger caused it to drop. So they ordered their brokers to acquire the stock at prices as high as $17 and subsequently made a formal tender offer at $15. Blue Chip eventually acquired majority control of Wesco, and Munger persuaded Vincenti to stay on.

People following the acquisition were dumbfounded. Why had Blue Chip paid a higher price than needed? The Securities and Exchange Commission (SEC) opened an investigation18 (apparently at the instigation of FCSB).19 Authorities suspected that paying more than market value indicated that Blue Chip had unlawfully manipulated Wesco’s stock price or violated laws regulating trading in stock by tender offer bidders. Investigators were perplexed, as they believed that rational businesspeople always paid the lowest price available and charged the highest price obtainable. Their curiosity was aroused in part by the ambiguous relationship between Buffett and Munger and the confusingly complex structure of the various businesses in which they had become involved.

It was hard for people to understand what Buffett and Munger spent a year explaining: they paid a higher price to show integrity. Moreover, such a premium had economic value, because integrity is a reputational advantage that others would weigh in subsequent dealings. Buffett and Munger stressed both the immediate value of winning Vincenti’s respect and the longer-term value of Blue Chip’s “general business reputation.”20 The authorities were finally persuaded.21 Blue Chip acquired 80 percent of Wesco, and the company remains part of Berkshire, wholly owned since 2011.22

The third of Buffett and Munger’s early defining acquisitions added the unconventional motif that would come to characterize Berkshire’s approach to business: the Buffalo Evening News. Dating from 1881, the News helped build the tradition of newspapers shaping American civic debate. Credit went to Edward H. Butler Sr., who founded the paper.23 A biography portrays Butler as “emblematic of the late-nineteenth-century new journalists who built the modern press by wrenching civic discourse from its narrow partisan roots and carving out vital new cultural, social, economic, and political roles for newspapers.”24 Following Butler’s death in 1913, his son, Edward Jr., devoted his life to running the business according to his father’s principles. After his death in 1956, his wife, Kate Butler, took up the mantel.25

Advisers had long encouraged Kate Butler to minimize the taxes that would be due upon her death by transferring assets during her lifetime.26 They noted that failure to do so might necessitate a “fire sale” of the newspaper to make the payments. She died in August 1974 without having heeded the advice. As a result, her executors eventually put the paper up for sale. In December 1976, the estate offered the paper to the Washington Post Company, on whose board Buffett sat.27 Buffett told Kay Graham that if the Post did not wish to buy the News that he might. After the Post declined the opportunity, Buffett and Munger pursued it.