Berkshire Beyond Buffett(81)

In 2000, Berkshire bought a 15 percent stake in USG when its market price was $15.34 During the first half of 2001, the company fought to maintain the edge in asbestos battles, but reversals, including adverse jury verdicts, induced surrender. So it opted for another trip through bankruptcy.35 USG’s second bankruptcy spanned five years before the company emerged afresh in 2006. Thanks to the skill of its chairman, William C. Foote, USG again discharged all debt while preserving value for its common stock. Buffett called it “the most successful managerial performance in bankruptcy that I’ve ever seen.”36

In 2006, a frothy U.S. housing market spelled a business boom. But the construction industry’s cyclical nature was magnified when the financial crisis of 2008 struck and the housing market dove. USG’s stock price spiked to $100 in 2006 and then plunged to $6 by late 2008.37 At that point, amid the depths of the financial crisis, Berkshire invested $300 million in USG debt, yielding 10 percent annually and convertible into USG common stock at $11.40 a share.38

In 2009 and 2010, USG incurred significant losses and laid off five thousand employees—reducing its workforce to nine thousand.39 During economic recessions, many companies skimp on research and development, but USG doubled down after 2008.40 Responding to customer demand, USG researchers created sheetrock one-third lighter than historical offerings. It is easier to lift and maneuver, saving costs and meeting customer preferences.

USG returned to profitable growth in 2013. Once the U.S. economy and USG recovered, USG’s stock price rose to $29. Berkshire then converted its debt into common equity. Besides earning 10 percent for five years, the conversion doubled the value of Berkshire’s investment at a fraction of the cost, boosting its equity ownership of USG to one-fourth; and given its fit with Berkshire culture, USG is a prime candidate for full acquisition.




In 2013, in an unusual move, Berkshire co-invested with 3G Capital, a Brazilian private equity firm run by billionaire Jorge Paulo Lemann, to acquire H. J. Heinz Company. Each staked $12 billion, with 3G funding part of its interest using debt and Berkshire receiving part of its investment in preferred stock. At the 50 percent ownership level, for Berkshire, Heinz is neither a typical controlled subsidiary nor a conventional investee position, but something in between—a new deal structure for Berkshire that Buffett says could become a model for its future.41

The company was formed in 1869 by Henry J. Heinz and L. C. Noble as Heinz, Noble & Company to sell bottled horseradish.42 After failing amid the panic of 1875, Henry reorganized it with a focus on ketchup. In 1888, taking control of the company, he renamed it H. J. Heinz Company. The marketing slogan “57 varieties” first appeared in 1892; by 1900, though the company already had some 200 products—including pickles, mustard, vinegar, and olives—the slogan graced New York City’s earliest electronic billboards, including a forty-foot long pickle at Fifth Avenue and 23rd Street.

Pioneers in global trade, the company opened its first facility abroad, in England, in 1905. Heinz’s factories were considered models for their safety and considerate treatment of employees. Breaking ranks with his industry, Heinz supported the Pure Food and Drug Act of 1905, the progressive federal legislation intended to promote purity in processed foods; he supported it because he believed it would help to promote consumer confidence.

Henry died in 1919, handing leadership to his son Howard until 1941, when Howard’s son, H. J. (“Jack”) Heinz II succeeded him. During Jack’s lengthy tenure (he was chief executive until 1966 and chairman until his death two decades later), the company expanded at home and abroad. It went public in 1946 and then pursued an impressive acquisition program that included StarKist tuna (1963), Ore-Ida Foods, Inc. (1965), and Weight Watchers, International (1978). Heinz participated in the era’s industry shifts, as supermarket chains developed and new distribution systems emerged (including those pioneered by Berkshire’s McLane).

In 1979, a non-family member became chief executive, Anthony J. F. O’Reilly, a workaholic taskmaster who drove the business in even bolder directions. Heinz made an additional twenty acquisitions during the 1980s. The company met the competition from generic products head-on, employing creative cost-cutting measures such as using thinner glass bottles to reduce expenses of both packaging and shipping, shrinking the size of some products, and minimizing labeling. Sales doubled during the 1980s: from $3 billion in 1980 to $6 billion in 1990.

Amid the globalization of the 1990s, the company engaged in a major reorganization, akin to what P&G had done in the same period, along product lines worldwide rather than the traditional geographic approach. The program included a combination of downsizing (facility closures and layoffs) and selected divestitures (including Weight Watchers, though it maintained a co-marketing relationship). In 1994–1995, Heinz acquired Budget Gourmet (frozen meals) and the pet food businesses of Quaker Oats Company (Kibbles ’n Bits, Gravy Train, and Ken-L Ration).