• Have broad vision: Bob viewed potential deals from multiple angles simultaneously; Buffett and Munger view them against multiple alternative opportunities.
• Be patient: Appreciate long-term values, but be swift and agile in decision making, especially about acquisitions.
• Know that capital assets require reinvestment to maintain: Depreciation expense is a cost of operations, not a mere accounting convention that can be ignored in favor of cash flow analysis.
• Maintain cool rationality: Use common sense and think logically.
Each of these men deployed these skills in the early years with the mission of building a company; they used these skills in their later years with a view to sustaining it.
On a whimsical note, Berkshire and the Marmon Group share a pedigree of nomenclature. The words Berkshire and Marmon are historical anachronisms: Berkshire Hathaway is a long-defunct textile company and Marmon a long-defunct automaker. In 1964, when Colson acquired Marmon-Herrington, it adopted “the Marmon Group” as its corporate name. The choice was an inspired bit of Americana. At the first Indianapolis 500 auto race in 1911, the winning car was made by Marmon Motor Car Company, a producer of high-end automobiles.
Every company is unique, of course, and there are important differences between Berkshire and Marmon. Concerning acquisitions, for example, the Pritzkers used the Marmon Group to engage in hostile takeovers. Berkshire forswears them, as we know from examples like Berkshire riding in as a white knight to save Scott Fetzer from a raid by Ivan Boesky and, during the heyday of hostile takeovers in the 1980s, acquiring white squire positions in several companies to provide a takeover defense.
The Marmon Group engaged in bidding auctions for target companies, a practice Berkshire also generally avoids. For example, in 1995, the Marmon Group topped a competing bid for Atlas Steel, a specialty steel maker in Asia. In doing so, however, Bob Pritzker stressed a Marmon/Berkshire commonality: “We’re in it usually for the long run. We don’t just buy and sell companies.”29 Similarly, the Pritzkers sought turnaround situations, which Berkshire does not. Bob had the industrial engineering skills to make such an approach sensible from an operations standpoint, and Jay had the financial astuteness to assure related profitability. Berkshire has avoided turnaround situations because they are outside Buffett’s circle of competence—and he stresses that few have the skill. The Pritzkers were in this rare group.
Concerning investors, the Marmon Group was privately owned—entirely by the Pritzkers—whereas Berkshire is a public company. Were Berkshire also privately held, the precedent of the Marmon Group surviving its founders would be a definitive basis for predicting the same for Berkshire after Buffett. While the precedent does not make such a definitive case, the Marmon Group’s cultural features have contributed to its longevity, even as its ownership structure has changed from being privately held to being the subsidiary of a public company.
Even so, the post-Pritzker Marmon Group provides one potential model for the post-Buffett Berkshire Hathaway. The incremental changes that Nichols and Ptak made in the post-Pritzker years, with a few autonomous companies housing eleven divisions today, made the Marmon Group more manageable for newcomers and helped focus acquisitions and other growth strategies. While Berkshire has not imposed such order, it has the blueprint for such an organizational structure in the way that Buffett presents the subsidiaries in Berkshire’s annual report: insurance; regulated/capital-intensive businesses; finance; and manufacturing, retail, and services. The Marmon Group also offers an in-house professional services firm to group members wishing to delegate back-office tasks; it handles accounting, budgeting, human resources, finance, and legal tasks. Berkshire delegates these functions to each subsidiary, although there is a centralized accounting and auditing system that could be replicated to provide other functions.
Finally, the Marmon Group’s acquisitions were made with retained earnings from its industrial companies and reinvested in other industrial companies. In contrast, Berkshire generates large amounts of capital from insurance operations and invests the results not only in wholly owned subsidiaries but in minority stakes of other public corporations and some private ones. While not defining Berkshire culture as wholly owned subsidiaries do, some portfolio investments shed light on the concept of corporate culture and help us understand Berkshire culture. The next chapter will look at some of the more illuminating investments in Berkshire’s portfolio.
13
Berkshire’s Portfolio
When Berkshire was negotiating to acquire Burlington Northern Santa Fe Railway, Roger Nober, the railroad’s general counsel, observed that Berkshire’s other rail investments could pose regulatory concerns.1 Buffett readily agreed to divest any stock investments as necessary, and Berkshire soon sold its 1 percent stake in Norfolk Southern Corporation and 2 percent position in union Pacific Railroad Co.2 He would not have agreed to sell a subsidiary to satisfy the same regulatory concerns. Similarly, if Berkshire faced insurance claims exceeding cash reserves, the stocks would be liquidated first, before any subsidiary. For Berkshire culture, relative permanence is just one of many differences between its controlled subsidiaries and the minority stock positions held in its portfolio.