The Man Behind the Legend at Berkshire Hathaway

question 61

Essay

The Man Behind the Legend at Berkshire Hathaway

Although not exactly a household name, Berkshire Hathaway (“Berkshire”) has long been a high flier on Wall Street. The firm’s share price has outperformed the total return on the Standard and Poor’s 500 stock index in 32 of the 36 years that Warren Buffet has managed the firm. Berkshire Hathaway’s share price rose from $12 per share to $71,000 at the end of 2000, an annual rate of growth of 27%. With revenue in excess of $30 billion, Berkshire is among the top 50 of the Fortune 500 companies.

What makes the company unusual is that it is one of the few highly diversified companies to outperform consistently the S&P 500 over many years. As a conglomerate, Berkshire acquires or makes investments in a broad cross-section of companies. It owns operations in such diverse areas as insurance, furniture, flight services, vacuum cleaners, retailing, carpet manufacturing, paint, insulation and roofing products, newspapers, candy, shoes, steel warehousing, uniforms, and an electric utility. The firm also has “passive” investments in such major companies as Coca-Cola, American Express, Gillette, and the Washington Post.

Warren Buffet’s investing philosophy is relatively simple. It consists of buying businesses that generate an attractive sustainable growth in earnings and leaving them alone. He is a long-term investor. Synergy among his holdings never seems to play an important role. He has shown a propensity to invest in relatively mundane businesses that have a preeminent position in their markets; he has assiduously avoided businesses he felt that he did not understand such as those in high technology industries. He also has shown a tendency to acquire businesses that were “out of favor” on Wall Street.

He has built a cash-generating machine, principally through his insurance operations that produce “float” (i.e., premium revenues that insurers invest in advance of paying claims). In 2000, Berkshire acquired eight firms. Usually flush with cash, Buffet has developed a reputation for being nimble. This most recently was demonstrated in his acquisition of Johns Manville in late 2000. Manville generated $2 billion in revenue from insulation and roofing products and more than $200 million in after-tax profits. Manville’s controlling stockholder was a trust that had been set up to assume the firm’s asbestos liabilities when Manville had emerged from bankruptcy in the late 1980s. After a buyout group that had offered to buy the company for $2.8 billion backed out of the transaction on December 8, 2000, Berkshire contacted the trust and acquired Manville for $2.2 billion in cash. By December 20, Manville and Berkshire reached an agreement.
-In what ways might Warren Buffet use "financial synergy" to grow Berkshire Hathaway? Explain your answer.

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