Warren Buffett has taught us countless things through the
years resulting from his major acquisitions. But one company that
made his luck change reveals all we need to know about where we
put our money.
The major purchase
Warren Buffett of
has long made known his desire "buy a wonderful business at a
fair price," and 2012 was one year where he was disappointed
about his progress. Yet, that changed quickly as the calendar
turned to 2013. In conjunction with private equity firm 3G
Capital, it was
on Valentine's Day that the firms had partnered to buy Heinz in a
deal that valued the beloved food company at $28 billion.
When the deal was made, Buffett said:
Heinz has strong, sustainable growth potential based on high
quality standards, continuous innovation, excellent management
and great tasting products. Their global success is a testament
to the power of investing behind strong brand equities and the
strength of their management team and processes. We are very
pleased to be a part of this partnership.
By the time the dust settled, and the official terms of the
agreement were finalized, Berkshire had a 50% stake in Heinz
worth $12.25 billion. The $28 billion figure contained the bonds
and other debt it has outstanding, which included an $8 billion
stake in preferred stock that pays a 9% dividend. With that in
mind, it's no wonder Buffett was "pleased" with the purchase.
But the natural question becomes, why exactly did Buffett make
Heinz his second-largest acquisition, trailing only the $44
of railroad Burlington Northern Santa Fe?
'Buy commodities, sell brands' has long been a formula for
business success. It has produced enormous and sustained
profits for Coca-Cola since 1886 and Wrigley since 1891. On a
smaller scale, we have enjoyed good fortune with this approach
at See's Candy since we purchased it 40 years ago.
At first glance, it's easy to see how Heinz clearly fits into
the prototypical mold mentioned above. In fact, Buffett himself
noted the brand first in his prepared statement. But the critical
thing for investors to see isn't only the power of strong brands,
but his second point, which is the power of strong
"The strength of their management team"
Buffett is considered -- rightfully so -- as a "value investor,"
who is keenly aware of the price he is paying for any business.
Yet, one of the things that often goes undiscussed is his careful
consideration of the folks atop the businesses he invests in.
In his 2007 letter to shareholders, when he discussed how he
carefully considered investments, he himself showed price
actually fell behind management when evaluating companies:
"Charlie [Munger] and I look for companies that have a) a
business we understand; b) favorable long-term economics; c) able
and trustworthy management; and d) a sensible price tag."
This is important to remember because reviewing Buffett's
lengthy discussion on why he made the Heinz deal reveals that
much of it focuses on the strength of Heinz itself; but he also
praises the management team at 3G Capital.
Consider his quote on CNBC when discussing the purchase:
Well, we always prefer to buy businesses, and that's what we
consider Heinz to be. Well, we'll -- we'll be in Heinz forever
and -- if a few of our partners decide to sell out at some
point, I hope they sell to us. So, this -- this -- you know, we
-- we'd like to buy -- we'd like to have bought 100 percent of
Heinz, but we -- we love the idea of Jorge Paulo Lemann being
our partner. So -- if it takes 50 percent of the equity to
bring him in -- that's fine with us.
In effect, Buffett is saying the business and economics of the
deal were absolutely something he approved of, but he was happy
to reduce his stake thanks to the strong management offered by 3G
Capital. He even went on to say in the six-hour 2013
question-and-answer session with Berkshire
shareholders: "Charlie and I paid more than if we were doing
the deal ourselves because Jorge Paulo Lemann is a great manager,
because he's so classy, so we stretched a little. I like the
So does this mean we should only look for strong management?
As you might suspect, Buffett thoroughly refutes that notion,
too. In 2007, when he remarked about the four things he looks
for, he went on to say:
Additionally, this criterion eliminates the business whose
on having a great manager. Of course, a terrific CEO is a huge
asset for any enterprise, and at Berkshire we have an abundance
of these managers. Their abilities have created billions of
dollars of value that would never have materialized if typical
CEOs had been running their businesses. But if a business
requires a superstar to produce great results, the business
itself cannot be deemed great.
We must see both the critical distinction between management
and manager, as well as the reality any company with command of a
singular point on Buffett's checklist -- sensible business,
strong economics, capable management, and a reasonable price --
doesn't mean it's a great investment.
As it relates to management, although Buffett once
, "it's hard to overemphasize the importance of who is CEO of a
company," we must see Buffett has highlighted the management
of 3G -- including the "talented associates" of Heinz's new CEO
Bernardo Hees, as well as its Chairman Alex Behring -- not just
Lemann in isolation. So we cannot only focus on the ability of
one singular manager.
And we must also remember that even an easy-to-grasp, great
business with strong management like Heinz isn't a great
investment if it is overvalued, as Buffett has also said, "a
business with terrific economics can be a bad investment if the
price paid is excessive."
The key distinction
So with all that in mind, the natural question of course becomes,
just how well is the new management at Heinz doing? As Brooklyn
, after excluding for various costs associated with the
acquisition, the team at Heinz "increased operating earnings
in less than a year."
That is to say, Buffett clearly evaluated both Heinz as a
company, as an investment and as an organization run by
individuals remarkably well.
The reality is, at times we can so easily be trapped into
thinking just one of Buffett's key considerations when making an
investment is worthwhile, but we must see there is a delicate
balance of all four. And when we make the right decisions with
the four of those, we too can find a Heinz, or if we're lucky,
two or three or ten.
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How Warren Buffett's Luck Changed
originally appeared on Fool.com.
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