Berkshire Beyond Buffett(5)
Buffalo then had two newspapers, the News and the Buffalo Courier-Express. The News had more advertising revenue than the Courier, and its circulation in the weekday market was higher. However, it ceded the weekend to the Courier by not having published a Sunday paper since the 1920s. Instead, it put out on Saturday afternoon a “Week-End” edition, a lighter version of what papers nationwide included on Sunday—arts, comics, opinion, television guide. Buffett had noted in periodic analysis of the newspaper industry that second papers were disappearing in most cities and foresaw the trend continuing. He perceived an opportunity with the News and, without conducting any due diligence, agreed to acquire it from Butler’s estate for a negotiated price of $35.5 million.28
Buffett and the paper’s managing editor, Murray B. Light, quickly got to work on the competitive front. The News reconfigured its Week-End edition, moved its release to Sunday morning, and began a Saturday morning issue comparable to its weekday paper. Ahead of the switch, the paper ran a promotion. It offered customers five weeks of the new program at the old rate, effectively throwing in the new Sunday paper for free. With the free papers committed for five weeks of delivery, the company boosted ad revenue by guaranteeing advertisers the Sunday circulation for that period.
Two weeks before launch date, the Courier, realizing this venture was a competitive threat, sued the News, alleging an illegal attempt to monopolize the local newspaper market. It claimed that the News’s giveaway program showed a predatory intent to ruin the Courier. In publicity campaigns to win over locals, the Courier portrayed Buffett as a monopolist liquidator poised to destroy Buffalo as a two-paper town. In court, its lawyers lambasted him for never having visited the plant and never having engaged acquisition consultants to evaluate the transaction.
A federal trial judge, Charles Brieant, agreed with the Courier. He suggested that a maximum of two freebies would have been valid. He then caricatured the case and personalities involved, skewering Buffett as an outside invader and accusing him of using “anti-competitive tricks and devices.”29 Brieant buttressed his view of Buffett as a predatory monopolist by citing the fact that he had conducted no due diligence. An appellate court, led by Henry Friendly, repudiated Brieant’s ruling as legally and factually flawed.30 But the suit took two years to resolve, entailed millions in legal fees, and delayed the News’s new Sunday paper.
To help deal with the crisis, Buffett persuaded Stan Lipsey, who had sold the Sun Newspapers to Berkshire, to oversee the News. Lipsey found that the paper was in excellent editorial shape but poor fiscal condition. He built on its strengths and, after suffering losses for several years, made the paper profitable by 1980. It eclipsed the Courier, which dissolved. Lipsey remained at the helm until 2012, anchoring the Buffalo News (as it came to be called) while Berkshire acquired scores of local newspapers that year and the next, notably the Omaha World-Herald.31
During the corporate control battles of the 1980s, many companies placed blocks of stock in friendly hands as a defensive measure. On several occasions Berkshire played the friend, dubbed a “white squire” or “white knight,” depending on whether buying a minority or a controlling block. One of those companies was Salomon Brothers, Inc., the investment banking firm.
In 1987 Salomon’s largest shareholder, Minorco, objected to recent expansion and perceived disagreement among the firm’s senior directors about business strategy.32 Dissatisfied with management’s response, Minorco began discussing a sale of its 12 percent block to Ronald O. Perelman, a corporate raider who had seized control of Revlon, Inc., the cosmetics giant, in a hostile bid. Salomon executives, led by John Gutfreund, feared that their company would be Perelman’s next target.
Among many defensive steps, including repurchasing the Minorco block, Gutfreund solicited Berkshire as a white squire. Buffett dictated favorable terms: a preferred stock that paid 9 percent, which either Berkshire could convert into common or Salomon would redeem in fifths annually from 1995 through 1999. In exchange, the preferred could not be sold as a bloc to any single party; moreover, before making any sale, Berkshire was required to offer it to Salomon for repurchase. Berkshire also agreed that it would not acquire more than 20 percent of Salomon’s stock for at least seven years.33
The cultural significance of this investment for Berkshire crystallized four years later, when Salomon was embroiled in a scandal involving illegal attempts by some employees to corner the bond market. Regulators and prosecutors were prepared to indict Salomon, a grave step against any company, which would destroy the firm’s standing. The stigma would stoke defections by rattled customers and employees, flight that could spell Salomon’s demise. To avert that fate, the Salomon board cleaned house and asked Buffett to serve as interim chairman.