Though part of a series, this post is different. I went back through the last 35 years of shareholder letters to analyze Buffett’s approach to acquisitions. As Charlie Munger has said, Buffett is scary smart. I say this because he adjusted through many different eras, while running a business that was part conglomerate, part closed-end fund.
In some ways the early years were different — more arbitrage, public investments take up more time in the shareholder letter. But what I find fascinating is that from the earliest days, it didn’t matter to Buffett whether he owned whole businesses, or parts of them.
Part of this feeds off of Felix Salmon’s recent piece on acquisition language, where he contrasts tuck-ins and bolt-ons, correctly concluding that the difference is only one of size, even though that is an informal distinction.
But since the ’80s Buffett has always talked about acquisitions. Here’s a graph indicating Buffett’s use of the term acquisition(s):
You will note that his use of phrases like “tuck-in” and “bolt-on” occur only in the 2000s. But the ideas were there long before that. There were many cases in the ’90s, and to a lesser extent, the ’80s, where subsidiaries of Berkshire Hathaway (BRK.A) made acquisitions. Buffett was always looking for ways to profitably deploy excess capital, and he knew that acquisitions facilitating organic growth was often far more effective than buying something totally new. Buffett was doing tuck-in and bolt-on acquisitions for 15 years before he mentioned the terms.
Buffett always saw the public and private markets as being complementary. He doesn’t care where he makes money; he just wants to make money. Below there is a list of Berkshire acquisitions by year, with slight commentary.
One thing to understand about Berkshire is that full and partial ownership of private public businesses was always a part of the plan. Growing out of a textile manufacturing business as a holding company, that should be obvious, as it should be when considering See’s Candies, Berkshire’s first acquisition.
Public and private, full and partial did not matter to Buffett. He was simply interested in what could grow the intrinsic value of the the overall enterprise best, within the concept of a margin of safety.
1987-1989 was kind of an in between era for Berkshire, where Buffett would talk about his Sainted Seven private firms inside Berkshire, until he bought Borsheim’s in 1989, which gave him no good way to describe his private holdings with a simple moniker.
As it is, when he began doing more acquisitions, the 1991-1993 era included the “Shoe Group,” which was not among his finer moments. But starting in 1995, with the purchase of the remainder of GEICO, is the start of the modern Berkshire. Acquisitions become a regular part of the plan. What makes that plain, was that post-1990 in years where Berkshire had no acquisitions, Buffett would discuss his theory on acquisitions for shareholders. He did this because when there are few promising targets to invest in, it is usually a sign that valuations are stretched.
And in general, Buffett chose wisely with the private businesses. Yes, there have been some that ended up being losers, or, not big winners, like the “Shoe Group,” and Scott & Fetzer’s untimely purchase of World Book, which was about to be obsoleted by Encarta, and then Wikipedia.
Buffett understood the need for sustainable competitive advantage. He also knew how much he could afford to risk in acquiring private firms. His “bite size” increased gradually until he could take down monsters like Burlington Northern. He bought businesses that would be hard to obsolete.
One thing I found interesting about reading through the older letters of Buffett was that his ideas on acquisitions were developed early, long before Berkshire ceased to be predominantly a public company value investor, which is the way that many still regard Berkshire.
And as a result, it should be no surprise that as Berkshire grew, given Buffett’s desire for owning as much of great businesses as he could, that Berkshire became a conglomerate, albeit one dominated by its leading insurance businesses.
Though we can look at the different strategies employed by Buffett over the years, and see how some played a larger role early on like arbitrage and distressed investing, Buffett had a singular focus for the investments that offer decent returns in the size range that will make a difference for Berkshire investors.
Once Berkshire got big, that meant becoming a conglomerate, albeit a special one, was the logical outcome. And I could be wrong, but that is the final corporate form for Berkshire. There may come a day in a post-Buffett era when it may do many things, such as spin off companies, or centralize functions. At present that won’t happen because Berkshire is the acquirer of choice for those that want to cash out, but don’t want the unique character of their organizations to change, which Buffett points at in the present Shareholders’ Letter as a unique competitive advantage. Berkshire does not compete on price in acquisitions; it does compete by saying that unless something goes badly wrong, Berkshire will be more than happy to let the management do its thing. It’s as if Buffett says, “Just make money, and send us back the excess. If you have need of cash for promising opportunities, let us know.”
And then, it lets a thousand flowers bloom, and a thousand schools of thought contend, so long as you make money and grow the value of the business. Berkshire is a unique business, and reflects the character of its founders (including Munger here). No other large firm that I know of offers as much latitude to its operating units.
One final note: Buffett has also had a very good nose for sniffing out good insurance enterprises. That’s the backbone of Berkshire. It’s interesting to see over the years how he assembled the various pieces. It would be interesting to see pre-1977 data on the insurance side, to look at how Buffett initially entered the insurance business, and transisted out of running a textile firm.
Tomorrow should have my final installment on Berkshire. I will review the 10-K and provide commentary.