Obviously, Buffett didn’t jump into Gen Re with the idea of changing management. The
situation unfolded, some would argue, as a result of Buffett’s long publicized practice of unequivocal purchase decisions, with little of that in-depth analysis of non-public detail-behind-the-balance-sheet that we term ‘due diligence’. It’s a term that conjures up images of teams of lawyers and accountants scouring through every corner of a potential acquisition for a month or more, looking for problems. To what end? Much like a pre-purchase home inspection, to give the purchaser an assurance that he/she (‘he’) actually is getting what he thinks he’s buying, and to identify potential problems that might lead the purchaser to either walk away or demand a price adjustment or other concession.
We can all understand the appeal to a seller of an ‘as-is’ sale, especially if it’s a quick, all-cash arrangement that is virtually guaranteed to close. With a Buffett purchase, there are no lenders in the background demanding that hoops be jumped through. The contract price is the price they will receive (*more on that shortly), and risk-of-closing (or renegotiating) doesn’t have to be included in the pricing thought process. This element can be significant, because a failed or highly litigated deal can be murderous to a company’s reputation, employee morale, customer relations, and even value. For many Berkshire-type acquisition candidates, an abandoned deal would also be a highly personal reflection on some company’s successful founder/owner.
With the vast majority of Berkshire acquisitions, this no-due-diligence risk is a pretty safe bet. And a pretty clever one. Buffett implicitly keeps the moral burden of a clean bill of health firmly with the sellers—and doesn’t transfer any of that burden to his own ‘home inspectors’. For the typical BRK-acquisition’s founder/owner signing onto a future with Warren Buffett, that’s a big responsibility. This ia an intriguing policy in several regards.
But what if the acquisition is a public company?
I’ve helped a number of companies heading into a sale (or other disposition, including sometimes liquidation) with their due-diligence preparation, and have occasionally acted as interim CFO through the event. A few observations:
a) Large liquidation situations virtually always involve a combination non-equity-holding managers and ‘other people’s money’.
b) Large companies without an active owner/on-site manager are far more likely to have problems that the owners (and often even the on-site managers) are genuinely unaware of – no matter how well-meaning or everyone is.
c) Even highly competent, highly ethical hired managers, if relatively new to the company, may not be aware of serious problems ‘buried in the details,’ especially at good-size public companies.
Now I know with Buffett and Berkshire, there’s a value in a consistent, keeping-to-our-word ‘rules are rules’ approach. But if were me, in public-company deals or where we see any of the characteristics above, we could at least do a modified ‘non-public-information review’, where perhaps a small team of my best internal people with relevant expertise took a considered, in-depth look at the material components of the acquisition. Not disruptive swarms of outside lawyers or accountants, but some intensive time by smart people who’s judgment I trusted, who could wade into the relevant details. If the purchase was material to me (the acquirer), then for sure we should make the time and effort.
_____
[*]One very large international company has a reputation for getting a sales contract at an agreed-to price executed with the seller, which includes extensive but reasonable-sounding ‘subject to’ provisions and remedies—including some substantial hold-backs—then essentially hammering the price down mercilessly in the due diligence process. In what should have been an amicable deal, they displayed over-the-top aggressiveness after the contract was signed. By contrast, a transaction with a Berkshire company would have been not only painless, but would have yielded a much better ‘net’ almost regardless of price.
_____
situation unfolded, some would argue, as a result of Buffett’s long publicized practice of unequivocal purchase decisions, with little of that in-depth analysis of non-public detail-behind-the-balance-sheet that we term ‘due diligence’. It’s a term that conjures up images of teams of lawyers and accountants scouring through every corner of a potential acquisition for a month or more, looking for problems. To what end? Much like a pre-purchase home inspection, to give the purchaser an assurance that he/she (‘he’) actually is getting what he thinks he’s buying, and to identify potential problems that might lead the purchaser to either walk away or demand a price adjustment or other concession.
We can all understand the appeal to a seller of an ‘as-is’ sale, especially if it’s a quick, all-cash arrangement that is virtually guaranteed to close. With a Buffett purchase, there are no lenders in the background demanding that hoops be jumped through. The contract price is the price they will receive (*more on that shortly), and risk-of-closing (or renegotiating) doesn’t have to be included in the pricing thought process. This element can be significant, because a failed or highly litigated deal can be murderous to a company’s reputation, employee morale, customer relations, and even value. For many Berkshire-type acquisition candidates, an abandoned deal would also be a highly personal reflection on some company’s successful founder/owner.
With the vast majority of Berkshire acquisitions, this no-due-diligence risk is a pretty safe bet. And a pretty clever one. Buffett implicitly keeps the moral burden of a clean bill of health firmly with the sellers—and doesn’t transfer any of that burden to his own ‘home inspectors’. For the typical BRK-acquisition’s founder/owner signing onto a future with Warren Buffett, that’s a big responsibility. This ia an intriguing policy in several regards.
But what if the acquisition is a public company?
I’ve helped a number of companies heading into a sale (or other disposition, including sometimes liquidation) with their due-diligence preparation, and have occasionally acted as interim CFO through the event. A few observations:
a) Large liquidation situations virtually always involve a combination non-equity-holding managers and ‘other people’s money’.
b) Large companies without an active owner/on-site manager are far more likely to have problems that the owners (and often even the on-site managers) are genuinely unaware of – no matter how well-meaning or everyone is.
c) Even highly competent, highly ethical hired managers, if relatively new to the company, may not be aware of serious problems ‘buried in the details,’ especially at good-size public companies.
Now I know with Buffett and Berkshire, there’s a value in a consistent, keeping-to-our-word ‘rules are rules’ approach. But if were me, in public-company deals or where we see any of the characteristics above, we could at least do a modified ‘non-public-information review’, where perhaps a small team of my best internal people with relevant expertise took a considered, in-depth look at the material components of the acquisition. Not disruptive swarms of outside lawyers or accountants, but some intensive time by smart people who’s judgment I trusted, who could wade into the relevant details. If the purchase was material to me (the acquirer), then for sure we should make the time and effort.
_____
[*]One very large international company has a reputation for getting a sales contract at an agreed-to price executed with the seller, which includes extensive but reasonable-sounding ‘subject to’ provisions and remedies—including some substantial hold-backs—then essentially hammering the price down mercilessly in the due diligence process. In what should have been an amicable deal, they displayed over-the-top aggressiveness after the contract was signed. By contrast, a transaction with a Berkshire company would have been not only painless, but would have yielded a much better ‘net’ almost regardless of price.
_____
