Berkshire Hathaway
In Reply To:
Scott Fetzer IRR: Great Purchase Indeed...

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By EliasFardo
September 3, 2002

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I can't help but wonder if this is the brightest mode of capitalism, where companies are purchased and then milked until they die, giving up their earnings to a higher authority but essentially stagnating in and of themselves. I know the final era in a company's lifecycle is "harvest", and that seems to be exactly what is happening to these companies.

I was not aware that Scott Fetzer was dying. I don't know what its sales and earnings were in 1986 when we purchased it, but it came at a cost of $315 million. Its $129 million of operating profits and $914 million of sales in 2001 indicate that it probably has grown by a considerable amount since then. Strange death, that.

The other dying Berkshire Hathaway companies, such as See's and the Buffalo News would show similar growth. Unfortunately, their numbers are not available.

The "harvest to death" labeling of Berkshire companies is a gross distortion of what is actually occurring. The facts make a lie of such talk.

In addition, I fail to see where anyone concludes that such a death is desired, by Buffett or anyone else. My belief is that there is a growth mentality that is impossible for many people, especially in this country, to shake. I have always called it the Fortune 500 Syndrome. Such an attitude is that it doesn't matter how good a steward a company is of its assets, how much money it makes or how good its decisions are regarding expansion and acquisitions; the only really important measurement criteria is if it gained a few notches on the Fortune 500 List, based on sales. Buffett simply rejects this. As far as I can tell, he takes growth where he can find it on reasonable terms, but where it is not available, he does not force it. To me, this is the wisest of all positions.

I understand that many reject such a notion. Berkshire Hathaway is one of the few companies where I have seen Buffett's philosophy so widely applied. There was a company called Teledyne that did the same thing in the 70's. For shareholders, it was incredibly successful. Eventually, the individuals who were so successful with the company retired, and the company fell on hard times.

This is the way I see this model.
1) Operate the company for profits and cash flow, not the self-aggrandizement of management.
2) Stick to you knitting.
3) Where growth is available, take it, but never force it. No management has a right to build their own private empire at the expense of the shareholders. The larger the operating unit, the more levels of managers, each of which is paid more than the level immediately below it. So you, at the top level, command more privilege, power, prestige and compensation as the company grows. Oh, and I forgot, stock options. Unfortunately, in many cases, this is the way the game is played.

4) Use the cash flow in the most desirable way for the shareholders. If that means investing in expanding the company that generated the cash, fine. If not, place it into one of the other operating companies that has better opportunities, or some other investment. If those are not available, return it to shareholders.

If I owned a large group of companies, this is exactly what I would try to do. And isn't this what investors try to do with their own money: find the most attractive place to park it? If you own a stock in a company that is not doing well, do you buy more shares, or do you place your available cash in other places? Why should Buffett do any differently?

Not including equity purchases (although Coke's sudden turn from the Gatorade acquisition might be another telling case) where Warren doesn't control the purse strings, how many of BRK's businesses are trying to expand the business, rather than merely grow what's already there?

All of them. The fact that you don't see it every year, doesn't mean that attempts are not made. But, growth is occurring and showing up in the numbers. And sometimes, for some companies, the best thing to do is wait. Just because the Tiger does not pounce, doesn't mean it didn't act.

No disrespect is intended by any of this, it's just this "harvesting of businesses" seems to have popped up in several threads lately, always in a euphoric sort of way, and I couldn't help but try to think of what, if anything, this company does at the other end of the market system, i.e. the 'invention" or "growth" of new businesses.

A lot. The substantial growth at GEICO came at considerable investment. The Nebraska Furniture Mart is opening a huge store in Kansas City. Behind the scenes, the jewelry stores open new locations and MidAmerica buys new residential brokerage companies. I have no doubt that the building products companies are working to expand their products, services and locations. We do not hear about all this because it is just business as usual. Should Berkshire issue a press release every time Acme Brick opens a new showroom?

Capital expenditures at Berkshire were $811 million against depreciation of $543 million. Someone is doing something.

I don't see growth as either or. You either grow or you don't. You either make growth your major goal or you ignore it. It reminds me of the growth vs. value debate in investing. Are you a growth investor or are you a value investor? Answer: Yes.

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