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Investors need to be cautious when their companies are keen on purchasing other firms. It’s well known that most mergers/acquisitions fail to produce shareholder value. This newsletter looks at the principles Buffett follows to improve the odds of success. He set these down for us shortly after buying Helzberg Diamonds in 1995.
Acquisition by walking around
On a sunny May morning a week or so after Berkshire’s 1994 annual meeting in Omaha, Warren Buffett was about to cross near the corner of 58th Street and Fifth Avenue New York when he was stopped by a woman who just wanted to say how much she had enjoyed the Annual Meeting.
Barnett C Helzberg, Jr, who was in New York to talk to Morgan Stanley about, possibly, selling his business, a 143 jewelry store chain carrying his family name, was 30-40 feet away when the woman in the bright red dress shouted across to Buffett. On hearing the name of the chairman of the company in which he held four shares he stopped and waited for the woman to say her goodbyes.
As Buffett went to cross the street – again – Helzberg saw his opportunity. He thrust out his hand, “Hello, Mr. Buffett. I’m Barnett Helzberg of Helzberg Diamonds in Kansas City” (Barnett Helzberg, Jr. (2003) “What I Learned Before I Sold to Warren Buffett: An Entrepreneurs Guide to Developing a Highly Successful Company” John Wiley & Sons).
Helzberg looked for some recognition on Buffett’s face. But none was forthcoming, despite Helzberg then being one of the largest jewelry chain in the country. But Buffett was polite and shook his hand, said “Hello” and graciously accepted more compliments about the Annual Meeting.
Then, in 30 seconds flat, “right there on the sidewalk, as busy New Yorkers rushed past us and street traffic buzzed around us, I told one of the most astute businessmen in America why he ought to consider buying our family’s 70-year-old jewelry business…I believe that our company matches your criteria for investment.”
As Buffett recalls the encounter his first thought was that he was hearing yet again that phrase about a “good fit” when the business hawker hasn’t really understood the acquisition criteria applied by Buffett and Munger, “it usually turns out they have a lemonade stand – with potential, of course, to quickly grow into the next Microsoft.” (Buffett’s 1995 letter to Berkshire shareholders)
Given the probability that this was yet another dead end Buffett cut short the conversation by civilly asking if Helzberg could write to him with the particulars, “that, I thought to myself, will be the end of that.”
Helzberg went home and sent Buffett nothing. He later said he was “afflicted by hang-ups about confidentiality. I’m the kind of guy who asks for someone’s Social Security number before I tell them the time.” Then one night he re-read Berkshire’s Annual Report and paid particular attention to the section where Buffett invites companies that meet his criteria to send him information.
Buffett’s acquisition criteria
Here is the regular “advertisement” included in Berkshire annual reports (this one is from 1995):
“We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $25 million of before-tax earnings),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
The larger the company, the greater wi
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