As a minority shareholder, Berkshire could influence but not dictate the affairs of companies such as Norfolk Southern or union Pacific—or even those of which Berkshire owns 9 to 14 percent, such as American Express, Coca-Cola, or Wells Fargo. In these companies, Berkshire cannot appoint or control all directors or officers or set anyone’s pay. In contrast, owning all the stock of Benjamin Moore, Gen Re, NetJets, and other subsidiaries gives Berkshire total authority over them, including the power to hire and fire and discretion regarding how to allocate profits and determine salaries. Berkshire’s subsidiaries identify with Berkshire in ways investees do not, most visibly defining themselves in their logos—“A Berkshire Hathaway Company” follows their names.
Investees—companies in which Berkshire has a minority interest—may fail, be acquired, reorganize, or become marketable securities that Berkshire sells or trades. Among Berkshire’s former investees that no longer exist due to merger or other corporate mortality are Beatrice Foods, Capital Cities/ABC, F. W. Woolworth, General Foods, and Knight Ridder. Among those Berkshire has sold are Freddie Mac, Johnson & Johnson, Kraft Foods, McDonald’s, Petro China, Travelers, and the Walt Disney Company. Berkshire traded shares in Phillips 66 to pay for Lubrizol’s acquisition of Phillips Specialty Products; traded shares in Graham Holdings, successor to the Washington Post, to acquire a television station; and traded shares in White Mountain Insurance Group, a company founded by Jack Byrne, who rescued GEICO from oblivion in 1976, for selected insurance assets.
The scale of Berkshire’s subsidiaries dwarfs that of its stock portfolio. For example, at the end of 2013, the total cost of Berkshire’s portfolio of investees was $56 billion, one-third the cost of Berkshire subsidiaries, and not much more than Berkshire invested in either BNSF or Berkshire Hathaway Energy alone.3 These investments had a market value of $115 billion, less than a fifth of Berkshire’s total assets.4 Today, 80 percent of Berkshire consists of subsidiaries and only 20 percent investees, a reversal from the early 1980s when Berkshire consisted of 80 percent investees and 20 percent subsidiaries.5
With some companies, such as BNSF Railway and GEICO, Berkshire initially took a minority position and subsequently acquired the rest, making them into wholly owned subsidiaries. From an investment standpoint, evaluations of minority interests and whole companies are kindred, as both include assessing a business’s economic characteristics and relating price to value. To qualify as an investment for Berkshire, whether investee or subsidiary, a business must have a moat, something to protect sustained profitability. In Berkshire’s subsidiary acquisitions, however, non-economic values play a role that minority purchases on the open market ignore.
When Berkshire purchases a minority position in a privately negotiated setting, such values do play a role. Examples include buying convertible securities or warrants, as with Gillette and Salomon Brothers in the late 1980s; Goldman Sachs, USG Corporation, and others amid the financial crisis of 2008; and taking a stake in a private company, such as Mars, Inc. or Wm. Wrigley Jr. Co. in 2008.6 In such deals, Berkshire can offer not only economic payments but valuable intangible promises, including autonomy and permanence. But in most common stock purchases, Berkshire buys anonymously at market without such an opportunity.
These differences mean that Berkshire subsidiaries constitute Berkshire culture in ways that investees do not. Controlled subsidiaries like Ben Bridge Jewelers, Clayton Homes, Dairy Queen, Lubrizol, and See’s Candies give Berkshire its identity, while investees of the past—and even larger current holdings like an $11.7 billion purchase of 6 percent of IBM in 2011 or a $3 billion purchase of 1.8 percent of Walmart in 2006 and 2009—at best contribute obliquely to this identity. (For a contrast, compare Berkshire’s subsidiaries with table 13.1’s list of leading current investees.)
Berkshire’s investee portfolio is like a business unit within Berkshire equivalent to a large subsidiary. While investees do not define Berkshire culture, their purchase and sale reflect Berkshire’s values, and many boast strong cultures, big personalities, and fascinating histories. Of particular significance are two of the oldest (Washington Post and Gillette, now Procter & Gamble), two of the largest (CocaCola and Walmart), and two of the most opportunistic (Goldman Sachs and, especially, USG, which is also a prime candidate for full acquisition). For a glimpse into the future, finally, we’ll look at another candidate for full acquisition—Heinz—and the novel partnership Berkshire made with a private equity firm to acquire half of it. At 50 percent, Heinz is neither an investee nor a subsidiary, and the transaction defines a new model for the next generation of Berkshire deals.