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Warren Buffett followed the Scott Fetzer saga in the press (see last newsletter) and thought it might be worth writing a letter to Schey to see if he might be interested in joining the collection of businesses owned by Berkshire; those which were granted a high degree of managerial autonomy and which are encouraged to focus on the long horizon. Buffett described how the deal came about in a lecture to Notre Dame Faculty MBA Students and Undergraduate Students Spring 1991:
“The Scott Fetzer company, ……World Book, Kirby, 20 others, Campbell Hausfeld, almost a billion of sales. They had been a New York Stock Exchange company and there was a takeover attempt, even Ivan Boesky was involved, they had a whole raft of things. I’d never met the fellow then. I wrote him a letter [October 10], I said “Dear Mr. Schey: Here’s what we are…” I sent him an annual report and said “If you want to do businesses with someone whose checks will clear, who won’t bother you, here’s all the shoes that will drop (I told him all the bad things about us), a one-page letter. Sent it. (Kind of difficult to get all the bad things about us on one page.) I said “If you want to talk about it, I’ll meet you, and if you don’t, throw the letter away.” He called me up, we met on a Sunday in Chicago [October 22], made a deal that night and, in a week, the deal was done. That was five or six years ago – I’ve been to Cleveland twice, not because I needed to be. He runs that business exactly like he [owned it himself].”
Schey told Fortune Magazine in 1988 that his speed and the waving of the due diligence rigmarole illustrates the lack of bureaucracy he encounters working with Buffett, ”If I couldn’t own Scott Fetzer myself, this is the next best thing”.
He added that is even better than running a public company having had his fill of institution investors questioning and second guessing him.
And he was frustrated with the board’s excessive caution in authorizing major moves, “Schey’s prize example is his current [1988] intention to decentralize the World Book organization, which has been hunkered down at Chicago’s Merchandise Mart forever. Schey’s old board, he says, would probably have resisted the risk of restructuring; Buffett waved him ahead.” (Fortune Magazine, 1988)
One week after that Chicago meeting Scott Fetzer’s board approved the sale. The day after the announcement (29th October 1985) The New York Times described the attraction of Scott Fetzer as its steady cash generation and its pile of cash. However, said an analyst, it was a “modest” growth business, but compensating for that it had low volatility.
It reported earnings in 1984 of $40.6 million, or $6.01 a share, a 26 percent increase from $32.2 million, or $4.80 a share, in 1983. Sales in 1984 were $695.4m.
Buffett could see much more than The New York Times writers; a set of strong economic franchise moats and some strong businesses. He particularly liked World Book as “something special” expressing in his 1985 letter to Berkshire shareholders the feeling of attachment that many felt to the books:
“World Book, Inc. – accounting for about 40% of Scott Fetzer’s sales and a bit more of its income – is by far the company’s largest operation. It also is by far the leader in its industry, selling more than twice as many encyclopedia sets annually as its nearest competitor. In fact, it sells more sets in the U.S. than its four biggest competitors combined.
Charlie and I have a
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