In 1998, William R. Johnson succeeded O’Reilly as chief executive while annual sales approached $10 billion. Sales remained steady for years, however, as Johnson maintained scale rather than expand it. In 2006, concerned about modest results, Nelson Peltz, a corporate raider turned shareholder activist, targeted Heinz in a proxy contest, winning seats on the board. Yet the business continued its steady rather than rapid growth, becoming a company with more promise than performance. Sales in 2012 were $12 billion, as the company remained best known for ketchup, while selling thousands of food products in every nook of the globe.
In January 2013, Berkshire and 3G offered $70 per share in an unsolicited bid, a 20-percent premium over the prevailing per-share price. The Heinz board responded by requesting more money and stressing that no deal could be made without assurances that the buyers would maintain Heinz’s presence and heritage in Pittsburgh. Berkshire and 3G upped their bid to $72.50 and made the Pittsburgh commitment.
Among unusual features of this transaction for Berkshire were the making of an unsolicited offer, which Berkshire had always shunned, and the presence of a co-investor, which it had disfavored. On the other hand, Lemann, whom Buffett has known and admired since the two served together on Gillette’s board, brought the idea to Buffett, and the two agreed that 3G rather than Berkshire would call the shots at Heinz. This decision explained another twist: Lemann quickly appointed a new CEO, the former head of Burger King, and a series of management changes ensued.43
As a prototype for future Berkshire acquisitions, the Heinz deal is savvy. The private equity partner likely will wish to sell within five to ten years, and assuming the improvements it makes at the company are effective, Berkshire will then acquire the rest. In this model, private equity firms become another potential source of Berkshire acquisitions, teeing up opportunities in which the shorter-term needs of private equity can be married to Berkshire’s patient capital. The prospects are good that Berkshire will acquire the rest of Heinz, which is a Berkshire kind of company, while replicating the structure in other acquisitions.
Aside from shedding indirect light on Berkshire culture, profiles of corporate icons in its portfolio show the power of culture to transcend individuals. Formidable figures—whether Kay Graham at the Washington Post, Sam Walton at Walmart, or Sewell Avery at USG—put indelible stamps on their companies. However, chief executives come and go, whereas corporate cultures endure: P&G had twelve chiefs in twelve decades amid a consistent button-down brand-centric culture that at least one, Durk Jager, found resisted change. Coca-Cola had four chiefs in thirteen years yet preserves moorings that its early leaders would recognize—despite the mark left by the intervening stewardship of the legendary Roberto Goizeuta. He and successive chiefs at companies from Gillette to Heinz, as well as Graham’s successors at the Post and Walton’s at Walmart, remind us that few business leaders are indispensable to their companies.
Berkshire’s stock portfolio can be seen as a business unit akin in magnitude to Berkshire Hathaway Energy, BNSF, GEICO, Gen Re, Lubrizol, the Marmon Group, or McLane, with corresponding importance for who makes investment decisions. Historically this has been Buffett, along with Lou Simpson for GEICO’s portfolio until 2010. That year, Berkshire added sub-portfolio managers, Todd Combs and Ted Weschler, whose investees include DaVita HealthCare Partners Inc., the medical equipment manufacturer, and DirecTV. Buffett heralds the duo as “models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit.”44 To date, the unit’s operation both reaffirms the distinctiveness of Berkshire culture and suggests the promise of its durability, which will be discussed in the next part of this book.
III
14
Succession
In January 2012, clients of Larson-Juhl, a custom picture frame maker that Berkshire Hathaway acquired a decade earlier, received a letter from Drew Van Pelt. The young executive, new to the industry, announced he had become chief executive of the company and reported the departure of his predecessor, Steve McKenzie, after two decades at Larson-Juhl.1 The move came as a complete surprise to many.
Larson-Juhl’s roots date to 1893, with the formation of Pacific Picture Frame in Seattle. Pacific grew as the industry did, booming with the invention of frame clamps and improved machinery to cut mats. In 1968, Pacific merged with Juhl, Inc., another major frame manufacturer that had been founded ten years earlier, and Juhl-Pacific became the dominant frame maker in the western United States. In 1988, Juhl-Pacific merged with Larson Picture Frame to form the industry leader, with sixty-seven manufacturing facilities in seventeen countries serving thousands of framing shops catering to a high-end clientele.