Berkshire Beyond Buffett(47)

In 2010, Buffett asked Sokol, then running both MidAmerican Energy and NetJets after Richard T. Santulli left,29 to scout acquisition opportunities. All Berkshire subsidiary chiefs are encouraged to seek acquisitions, but this assignment might have been a proving ground for Sokol, by then widely seen as the leading candidate to succeed Buffett.

Sokol began in a most un-Berkshire-like way, however, by hiring bankers to help with the search. Sokol instructed the team, from Citi, to focus on the chemicals industry. They identified eighteen potential targets, and Sokol was attracted to one, The Lubrizol Corporation, maker of specialty chemicals, including additives for the automotive and petroleum industries. On December 13, 2010, Sokol told the bankers to ask Lubrizol’s chief executive, James L. Hambrick, if the company might be interested in speaking with Buffett about a Berkshire acquisition. Hambrick said he would raise the proposition with Lubrizol’s board, and on December 17, Citi reported this to Sokol.

Sokol regarded Lubrizol as an outstanding company and an excellent investment. As a result, during the first week of January 2011, Sokol, with an annual income of $24 million,30 bought $10 million worth of Lubrizol stock. (He had also bought, then quickly sold, a smaller amount of the stock in mid-December.) The next week, on January 14, Hambrick called Sokol to express interest and set a meeting with Buffett. Sokol then reported the acquisition opportunity to Buffett.


Buffett responded, “I don’t know anything about Lubrizol.”

Sokol said, “Well, take a look at it. It might fit Berkshire.”

Buffett asked, “How come?”

Sokol replied, “I’ve owned it and it’s a good company. It’s a Berkshire-type company.”31



Buffett studied Lubrizol’s annual reports. He did not comprehend all of the chemical science, except to appreciate that petroleum additives are indispensable to running engines. However, understanding a business’ arcane details is far less important than grasping the economic characteristics of its industry and the company’s position, Buffett says.32 After speaking with Sokol and lunching with Hambrick on February 8, Buffett had a sense of Lubrizol’s culture and found the company’s prospects favorable.

By March 14, Berkshire agreed to acquire Lubrizol for a 30-percent premium over Lubrizol’s stock market price.33 After the announcement, John Freund, a Citi banker and Buffett’s stockbroker,34 called Buffett to congratulate him, expressing pride in Citi’s role in facilitating the deal. Surprised to hear of this role, Buffett had Berkshire’s CFO, Marc Hamburg, call Sokol for information about Citi’s participation in the deal and Sokol’s ownership of Lubrizol stock. During the following week, Sokol would provide more details, as Berkshire’s attorneys from Munger, Tolles & Olson grilled him while assisting Lubrizol’s lawyers in drafting disclosure documents about the transaction. Buffett was in Asia that week, and when he returned, Sokol tendered his resignation. Sokol had tried to retire from Berkshire on two previous occasions, but Buffett and the other Berkshire directors had persuaded him to stay. This time he would go.

On March 29, Buffett drafted a press release reporting Sokol’s resignation. He sent the draft to Sokol for review. The draft attributed Sokol’s resignation to how recent events had dashed Sokol’s hopes of succeeding Buffett at Berkshire. Sokol objected to this explanation. Not only did Sokol disclaim pretensions of succeeding Buffett, he said he was resigning for personal reasons and did not believe he had done anything wrong.35

So before issuing the press release the next day, Buffett replaced the original wording with an excerpt from Sokol’s resignation letter. The release attributed Sokol’s resignation to his desire to manage his family’s resources. Buffett then lauded Sokol’s “extraordinary contributions” to Berkshire, referencing MidAmerican Energy, NetJets, and Johns Manville. The release then summarized Sokol’s Lubrizol stock purchases, concluding that they were lawful and reiterating Sokol’s claim that they had nothing to do with his resignation.

The March 30 press release sparked criticism. People could not reconcile Berkshire’s and Buffett’s usual rectitude with mild commentary on what appeared to outsiders a case of insider trading. It “suggested a degree of [Buffett’s] closeness to Sokol and perhaps a degree of reciprocity and a willingness to let him slide because he had done good things for Berkshire in the past.”36 Shareholders demanded to know why Buffett was not furious.

Buffett accepted the criticism, noting that had Berkshire’s lawyers written the release, it would have been worded more carefully.37 Munger acknowledged that the press release was flawed, though cautioned against letting anger figure in such exercises.38 Corporate lawyers have honed the sober craft of drafting press releases, and CEOs usually entrust the task to them. Much as with Buffett’s idea to move GEICO into the credit card business, his mistake of writing his own press release underscored the value of delegation. In the Sokol case, this was rather ironic, considering how critics soon attacked Berkshire culture as being too hands-off.