Andrews founded TTI in 1971 in a spare bedroom of his small apartment after being laid off as a buyer for General Dynamics, where he had seen the difficulties manufacturers faced sourcing electronic components.34 Sales that year were $112,000; by 2006, they tallied $1.3 billion.35 That’s huge volume for a company with numerous products—resistors, capacitors, and connectors—selling for less than $1 apiece.36 In 2006, John Roach, chairman of Justin Industries when Berkshire acquired it in 2000, contacted Buffett about TTI and Andrews.37 Roach had earlier helped John Justin Jr. find an eternal home for his beloved boot and brick business. Now Roach called to say that Andrews was seeking a permanent home for TTI. Andrews, sixty-four at the time, had an inspired and touching motivation. As Buffett explained:38
Not long ago he happened to witness how disruptive the death of a founder can be, both to a private company’s employees and the owner’s family. What starts out as disruptive, furthermore, often evolves into destructive. About a year ago, therefore, Paul began to think about selling TTI. His goal was to put his business in the hands of an owner he had carefully chosen, rather than allowing a trust officer or lawyer to conduct an auction after his death.
Paul rejected the idea of a “strategic” buyer, knowing that in the pursuit of “synergies,” an owner of this type would be apt to dismantle what he had so carefully built, a move that would uproot hundreds of his associates (and perhaps wound TTI’s business in the process). He also ruled out a private equity firm, which would very likely load the company with debt and then flip it as soon as possible. This left Berkshire.
It took Andrews and Buffett little time to agree on terms: they met in the morning and had a deal before lunch.39 In reaching an agreement on valuation, Berkshire culture’s promise of permanence was important. TTI achieved record sales and earnings in 2008 and again in 2010, although it operates in a competitive industry that kept margins tight in 2012 and 2013.40 Internal growth is complemented by acquisitions, including Sager Electronics in 2012 and Ray-Q Interconnect Ltd. in 2013.
Berkshire does not go out of its way to hunt for companies that have proven their business models durable by brushes with serial owners, daring financiers, or bankruptcy trustees. But companies that survive such ordeals—including Fruit of the Loom and Johns Manville—prove their resilience. Owners or managers vie for the value of a permanent home that every Berkshire subsidiary cherishes.
Nor does Berkshire acquire companies in need of a business turnaround, a tough task often compounded by the need to effect changes in corporate culture. As Buffett noted when explaining how GEICO, despite its near insolvency in 1976, was not a turnaround: “When a management with a reputation for excellence tries to tackle a business with a reputation for bad economics, it is usually the reputation of the business that stays intact.”41 That’s not to say that turnarounds should be forsaken. Some have made great successes of them. Exemplars are Jay and Robert Pritzker of The Marmon Group, the Berkshire subsidiary featured in the next chapter.
12
All One
Suppose you are an analyst asked to evaluate a diverse conglomerate comprised of hundreds of different companies in numerous sectors, including financial services, transportation, energy, construction, manufacturing, and so on. The businesses are low-tech and unglamorous. They are also leaders in their industries. The companies were acquired at different times without any master plan.
The conglomerate’s aging chairman and vice-chairman have guided the company during the four decades since its inception. The two billionaires make essentially all important corporate decisions, with scant oversight from the board of directors. Adhering to a hands-off management policy emphasizing individual autonomy, all other decisions are made by managers of the various subsidiaries. If pressed to predict the conglomerate’s fate after the passing of its chairman and vice-chairman, what would you say?
This scenario describes the task that analysts faced in the mid-1990s when evaluating what would happen to the Marmon Group after Jay and Robert Pritzker passed away, and of course, it also describes the task an analyst would be faced with today in considering the future of Berkshire Hathaway. Many analysts thought that the Marmon Group was too unwieldy for any but the Pritzkers to run and predicted it would perish soon after they left.
The analysts were wrong. In 2008, the Marmon Group became a subsidiary of Berkshire Hathaway, and it continues to operate pretty much as it had for decades.1 This is why the story of the Marmon Group is so poignant. A conglomerate that might be called a mini-Berkshire, it possesses the same cultural traits as Berkshire and its sister subsidiaries. These common traits explain why Marmon, one of Berkshire’s largest and most profitable subsidiaries, fit right in at Berkshire.