After Drayton retired from McLane to buy the Houston Astros baseball team in 1992, he was succeeded first by Joe Hardin, who presided for a decade, and then by W. Grady Rosier, who has run McLane since. Both successions were effective as McLane sustained its peerless growth trajectory, which the company continued through acquisitions.
Building on McLane’s traditional food distribution business, Rosier oversaw its acquisition of Meadowbrook Meat Company, Inc. (MBM), a North Carolina–based food distributor to national restaurant chains, including Arby’s, Burger King, Chick-fil-A, and Darden Restaurants (Capital Grille and Olive Garden). Founded in 1947 by J. R. Wordsworth, the second-generation family business generates annual revenues of $6 billion through a network of thirty-five distribution centers across the United States. After McLane’s acquisition, nothing at MBM changed except for the larger scale that the association provided.
Rosier is also leading McLane’s expansion into new products, principally through acquisitions. In 2010, for example, it acquired Empire Distributors, a wine and spirits distributor operating in Georgia and North Carolina. In turn, Empire promptly acquired Horizon Wine & Spirits, a wine and spirits distributor in neighboring Tennessee. In 2013, McLane made a joint investment in Missouri Beverage Company, adding another contiguous state to this expanding market.8 In coming decades, expect to see McLane distributing wine and spirits across the United States.9
Managerial savvy in capital allocation—whether for internal growth or external acquisitions—is important because mistakes are costly to shareholders. Mistakes are especially costly when managers overpay to acquire a new business. The risk of overpayment in acquisitions arises from a combination of managerial hubris and easy access to excess cash, newly issued stock, or borrowings. Managers overestimate what a new acquisition will do for a company, which then leads to value destruction.
Curbing managerial hubris and controlling the source of funds are among the ways to minimize the risk of overpayment. Berkshire’s culture offers advantages along both lines. For example, acquisition markets tend to run in cycles, with bursts of activity followed by lulls. A common mistake is to get in the wave and buy as the cycle shifts from being a buyer’s market to a seller’s market. Experts refer to this problem as the fallacy of “social proof,” the belief that if everyone is doing something, it must be desirable.10 Berkshire’s elongated time horizon diminishes the temptation to follow the crowd.
Concerning funding—debt, stock, or excess cash—Berkshire’s culture and structure limits access to all three, a check against improvidence. Rivals often finance acquisitions with borrowed money, frequently at costs higher than gains. Berkshire’s culture of budget consciousness makes subsidiaries averse to debt for any purpose, including acquisitions. Other rivals pay in stock, but stock often feels like play money to managers, leading them to spend more freely. The psychology is akin to foreign currency when traveling abroad or gambling chips in a casino. At Berkshire, the problem of “funny money” is avoided because subsidiary acquisitions are never paid for in stock. (In fact, Berkshire has used its stock in only seven parent-level acquisitions, when sellers highly value that form of currency, as in the cases of Dairy Queen and Helzberg Diamonds.11)
Not all subsidiaries can reinvest resources at high rates of return. Within Berkshire’s structure, these subsidiaries distribute excess cash to Berkshire, which redeploys it to sister subsidiaries that can reinvest it at high rates of return. For example, both Scott Fetzer and See’s Candies generated hundreds of millions of dollars of excess cash in their lifetimes with Berkshire. But See’s only requires fractions of that to sustain itself,12 and Scott Fetzer rarely finds the value-enhancing alternatives available to sister subsidiaries.13 So Berkshire allocates the excess cash from one group of subsidiaries to another. The economic value to Berkshire of such cash cows is greater than the cash alone, as it produces advantages that result from commanding large capital pools, including the ability to act opportunistically and the chance to acquire large positions quickly.
At given subsidiaries, another strategy to mitigate the risk of overpayment in acquisitions is to use the same value-of-values approach to subsidiary acquisitions that Berkshire uses in its acquisitions. MiTek Inc., a St. Louis–based firm Berkshire acquired in 2001, has done so when acquiring some of the companies that led to revolutionary change in building construction in recent decades.
Comparing homes built through the 1960s with those since the 1990s, it is easy to notice great differences in the rooflines. Mid-century roofs were simple, short, and uniform within neighborhoods, as roof-making assemblies were cumbersome and costly to change from one home to the next. Roof trusses—the structural framework in the space between the rooms and roof of a building—were often pre-fabricated to save costs. But thanks to MiTek, the machinery has become so advanced that it is cheaper and easier to tailor the shape and style of roofs. Trusses now have elaborate cuts, peaks, valleys, and hips; they have longer spans and steeper pitches. Homes today are not only more varied at the roofline, but stronger and taller.