Berkshire Beyond Buffett(7)
Berkshire’s other 1986 acquisition brought the company into yet another industry. On January 15, 1986, a long-time Berkshire shareholder, Robert W. Heldman of Cincinnati, sent Buffett a letter. Heldman introduced himself as the chairman of Fechheimer Brothers Company, a company Buffett had never heard of. When the two men later met in Omaha, Heldman explained that the firm had been making and distributing uniforms since 1842, catering to the public service industries: corrections, fire, military, police, postal, and transit. Customers include the United States Navy, police departments in Cincinnati and Los Angeles, and transit authorities in Boston, Chicago, and San Francisco.
Heldman’s father, Warren Heldman, joined the firm in 1941. He would be followed by his sons, Robert and George, who would ultimately be followed by their sons, Gary, Roger, and Fred. Innovation had long been a hallmark of Fechheimer, with offerings including specialized pants developed in partnership with federal authorities for law enforcement personnel. Government contracts helped the textile manufacturer cope with the challenges presented by cheap foreign labor and international shipping thanks to a patchwork of laws that require government agencies to “buy American.”4
In 1981, however, Fechheimer had been sold in a leveraged buyout to an outside investment group, though family management retained an equity interest. Despite a heavy debt load, the company’s budget consciousness enabled it to meet obligations. By 1985, it had retired a large portion of its debt and boosted the value of its equity. It was time for the outside investors to go.
Heldman thought Berkshire would be a good buyer. The family, spanning several generations, enjoyed running their business and wished to continue doing so without interference from a new owner and the fear of being sold on a whim.
Buffett agreed. He liked Fechheimer’s strong record of profitability and industry leadership and admired its committed family management. Berkshire acquired an 84-percent interest for $46 million, with the family retaining the rest. Notably, no one from Berkshire paid a field visit to Cincinnati, and no one from Fechheimer conducted any reciprocal due diligence. In fact, ever since the federal judge gratuitously excoriated him for not conducting due diligence in the Buffalo News acquisition, Buffett had made it a point of pride to skip such exercises, making his earlier visits to the Berkshire Hathaway textile mills and See’s chocolate factory stand out as anachronisms.
Fechheimer and Scott Fetzer differ greatly. Fechheimer is a very old, multi-generation private family firm in a specialized line of business tailored to institutional customers. A small firm of which Buffett had been unaware, it was operated by owner-managers, who steered the company prosperously through the challenges of a leveraged buyout by the time it arrived at Berkshire. Scott Fetzer, on the other hand, assumed its conglomerate form in the late 1960s and engages in many lines of business, selling products retail through a network of independent distributors and dealers. A large publicly traded firm that Buffett followed in the news, it had been operated by a cadre of professional managers who steered the company to Berkshire as an alternative to leveraged buyout. Even the structure of the deals differed: full ownership of Scott Fetzer versus a 16-percent retained family interest in Fechheimer.
What both companies had in common that appealed to Buffett were good management, proven profitability, and industry leadership. The other common denominator was what each valued in Berkshire: autonomy and permanence. Scott Fetzer—both management and shareholders—rejected the hands-on control and piecemeal liquidation of the Boesky leveraged buyout in favor of the managerial autonomy and permanence of Buffett and Berkshire. The Heldman family, having seen a leveraged buyout through, turned to Buffett, who offered a permanent home at Berkshire and hands-off management.
Today, Berkshire’s subsidiaries engage in a multitude of unrelated businesses, each contributing in its own way to Berkshire. In an effort to organize the diversity, four business sectors are outlined in Buffett’s annual letter to Berkshire shareholders, and each sector is broken down into further subdivisions. The first sector, insurance, is Berkshire’s oldest and the most important in terms of historical contributions to business value. The second, regulated or capital-intensive industries, is the newest sector and is becoming increasingly important in terms of revenues and earnings. The third sector is finance and financial products, the smallest of the four, though significant in absolute size. The final sector is a broad cluster of companies, encompassing various types of manufacturing, service, and retailing, including Fechheimer and Scott Fetzer.