XTRA was among the first U.S. leasing companies to lease trailers on flat cars, an early form of intermodal transport nicknamed “piggybacking.”3 With piggybacking, a truck trailer can be readily lifted onto a railcar. Historically, transportation systems were segmented, with each mode (pallets, tractors, trailers, railcars, barges, ocean vessels, storage facilities) vying with the others rather than coordinating. In recent decades, XTRA has participated in the global integration of these modes, producing intermodal elements ultimately suitable for universal container shipping.
When Berkshire acquired XTRA, its chief executive was Lewis Rubin, headquarters were in Westport, Connecticut, and the company was engaged in both trailer leasing and intermodal container operations. But overhead was high, return on assets low, and earnings modest. Within three years after Berkshire’s acquisition, Rubin was replaced by William H. Franz, a long-time company executive; headquarters were relocated from Westport to St. Louis; and XTRA divested its container and intermodal business to focus on leasing tractor trailers. The goal was to reduce overhead, improve asset utilization, and boost profits. It is rare for any one of these reforms to follow a Berkshire acquisition, let alone all three. XTRA is a reminder that Berkshire is a business and its culture without fairy tales, despite lofty aspirations and a solid record of achieving them.
Remembering that the Berkshire model has limits, and that mistakes are inevitable, helps sustain the company by avoiding nostalgia traps. Read Buffett’s annual letters and you will find him acknowledging mistakes, including several referenced in this book. For example, Buffett miscalculated in Berkshire’s acquisition of Dexter, the shoe subsidiary acquired in 1993, and folded it into H.H. Brown when it couldn’t survive. Berkshire’s 1998 acquisition of Gen Re ultimately proved valuable, but not before several years of cost to shareholders and angst for managers. Buffett learned this lesson early on, as the original acquisition of Berkshire Hathaway was a doozie.
Autonomy is sacrosanct at Berkshire. The hands-off approach, however, is not intended to be an abdication, though it can come close. When it does, the consequences are significant even if the net benefits are positive. Autonomy in the case of NetJets resulted in balance sheet management and cost structures Buffett ultimately disliked, prompting him in 2009 to ask Richard Santulli to withdraw and David Sokol to step in. The trust implicit in the notion of autonomy was a cause of the crisis in 2011 when Sokol bought Lubrizol shares ahead of pitching the company as a Berkshire acquisition.
Buffett has a gift for choosing outstanding managers, and Berkshire prides itself on the long tenure of its executives, making the exceptions stand out. In the 1990s, Fechheimer had a series of presidents, including Richard Bentley, who had been promoted from a divisional head within Scott Fetzer; in 1998, he resigned from Fechheimer without comment by him or Berkshire, succeeded by Patrick Byrne, who stayed just two years.4 In 2002, Sheila O’Connell Cooper, chief executive of the Pampered Chef, left after five months on the job without a trace.5 In 2006, Barry Tatelman withdrew from management of Jordan’s Furniture to embark on a career in the arts, leaving his brother Eliot in charge.6 While these departures do not usually lead to revelations of any particular difficulties, they can cause upheaval at the subsidiaries. Buffett’s successors must vet managers carefully.
Buffett has a unique approach to acquisitions, which has served Berkshire well but is difficult to emulate. Most corporations, including conglomerates, adopt a formal plan charting desired sectors in which to expand, sometimes even naming acquisition targets. In contrast, when describing given transactions in his annual letters, Buffett calls Berkshire’s acquisition strategy “haphazard”7 and “serendipitous,”8 neither “carefully crafted” nor “sophisticated.”9 He considers Berkshire’s lack of a plan a strong plus. Plans constrain judgment and discretion, both of which are vital in making acquisitions prudently.
In the acquisitions market, companies commonly hire investment banks and other intermediaries to broker deals. Buffett prefers to avoid these.10 In fact, Berkshire does not usually initiate the process but rather responds to proposals from sellers. Here are the sources of the thirty-five deals for which information appears in Berkshire disclosure.11 Eleven involved sellers contacting Berkshire;12 nine arose when existing business relationships contacted Buffett;13 seven involved friends or relatives reaching out to Buffett;14 four involved Berkshire contacting the seller directly;15 three were teed up by strangers or acquaintances;16 and only one came from a broker Berkshire retained, the anomalous case of Sokol hiring Citi in the hunt that led to Lubrizol.