The most exciting activity for Charlie and me is the acquisition of a business with excellent economic characteristics and a management that we like, trust and admire. They are not easy to make but we look for them constantly. After numerous failures, I revised my strategy to buy good businesses at fair prices rather than fair businesses at good prices.
A. Bad Motives and High Prices
If something's not worth doing at all, it's not worth doing well. There are 3 ways to avoid destruction of value for old owners when shares are issued for acquisitions.
1. Have true business-value-for-business-value-merger
2. The acquirer's stock sells at or above it's intrinsic business value.
3. Acquirer go ahead with the acquisition but then subsequently repurchase a quantity of shares equal to the number issues in the merger.
B. Sensible Share Repurchases Versus Greenmail
Our endorsement of repurchases is limited by price/value relationship.
C. Leveraged Buyouts
The corporate tax effects is so large in leverages buyouts. The hordes of leveraged buyouts operators raise the general level of acquisition prices to the detriment of other would be acquirers. The LBO operators will not go away as long as present permissive laws last.
D. Sound Acquisition Policies
We never give a glance at projections. We don't have a strategic plan, we simply decide what makes sense for our owners. In making acquisitions we can offer stock instead of cash if and individual or a family wishing to defer personal taxes by selling the business. We like dealing with owners who care what happens to their company and people. We give complete autonomy to our managers. We will never lose appetite in buying companies with good economics and management in place.
We are looking for:
a) Large purchases
b) Demonstrated consistent earning power
c) Businesses earning good returns on equity while employing little or no debt
d) Management in place
e) Simple business (if there's technology, we won't be able to understand it.
f) An offering price (we don't want to waste our time)
We prefer to buy for cash but will consider issuing stock.
E. On Selling One's Business
Most owners spend a lifetime building their businesses. It's a learning process involving many successes and failures but they can only sell their business once. Doing it right must be a priority.
There are 2 types of buyers:
a) A company in your industry looking forward to make the purchase and transform the business or dissolve it for the benefit of the main business by changing, eliminating current processes.
b) Solely for the financial returns involving massive debt to profit in the near future by selling it out.
Berkshire is totally unique. We buy to keep both the business and the managers to operate the business autonomously. We would want the operating members of your family to retain 20% interest in the business while we need 80% to consolidate earnings for tax purposes. There would be no brokers involved. Our acquisitions mostly comes in the form of referrals from other managers who have sold to us in the past. We would prefer to wait for the phone call rather than making the call.
F. The Buyer of Choice
We find it meaningful when an owner cares about whom he sells to. We like to do business with someone who loves his company. When this emotional attachment exists, you will likely find within the business: honest accounting, pride of product, respect for customers and a loyal group of associates having a strong sense of direction. Berkshire can be a perfect "home" for the right owners. Our goal is to be "buyer of choice" for businesses particularly those built and owned by families. That means we must hold to our promises of holding businesses through thick and thin giving autonomy to our managers.
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