Berkshire Hathaway 2003 Annual Meeting Audience Question # 29

Berkshire has more acquisition opportunities now than 20 or 30 years ago

Warren Buffett:

Number 6.

Audience Member:

Yeah, hi. I’m Gautam Dalmia from India.

Sirs, if I would take you back to the start of your investing careers, I assume it would have been harder for potential acquisition opportunities to come by.

The question I would like to ask you sirs is, how did you ensure then that you had good enough deal flows coming to you to be able to choose from?

I have one more question. The Berkshire subsidiaries do not have a retirement policy. What are the implications of this on retaining and motivating employees who are potential successors to senior management?

Warren Buffett:

First question about deal flow. It’s a term I actually don’t like very much, because we don’t think of them as deals, exactly. That has a little too much of the connotation of something to be bought, and then again something to be sold.

But we do like acquisition opportunities. And really that’s just achieving that so that we get the calls when we should get the calls.

And there aren’t lots of those, because we’re talking about good-sized businesses. We’re talking about owners that love their businesses.

And it’s going to happen occasionally, but it’s going to happen a few times a year, probably.

I think in the U.S. now, that we get a pretty reasonable percentage of the calls that we should get, and that was not true 20 or 30 years ago. We didn’t hear from anybody 20 or 30 years ago, to speak of, because we were looked at much more as being a marketable securities operation. And we just weren’t as well known.

It feeds on itself, obviously. If we acquire companies, and the people from whom we acquire them are happy about the deal, you know, we’re going to hear from more people.

We bought our first furniture operation in 1983. That really led to four other transactions, because the people in the first one were happy and they talked to us about the second one. And the people in the second one were happy and so on.

So, you know, it’s like… Charlie always describes compound interest as being like, you know, being at the top of a very large hill with wet snow and starting with a snowball and getting it rolling downhill. And that’s a little bit like the acquisition situation works.

We’ve been on a… by being around 38 years, it’s been a long… it’s been a high mountain, in terms of the length the snowball is going. By now, it’s going at a pretty good clip, and it’s a pretty good size, and it attracts a lot of snow. And that’s good for us.

Outside the United States we do not seem to be on the radar screen, so we don’t seem to hear about those as much. But we’re hearing about enough in the United States.

It’s not a flow, in the sense of… I don’t hear about one a week. You know, I don’t, probably, hear about one a month.

But the ones we want to hear about, most of them, I think, we’re getting the calls now. I think we’re getting a higher percentage of the calls now than ever in our history we would have gotten.

And, you know, that’s all to the good. And if we can do the same thing outside this country, that would be a plus, too. But this country’s a big market and we’ll just try and spread the word further.

And Charlie, what was that other question?

Charlie Munger:

Well, he talked some about deal flow, and there’s a general assumption that it must be easy to somehow arrange things that you just sat behind a desk and people brought in one wonderful opportunity after another, and you finally selected two out of 100 and it would be a virtual cinch.

That was the attitude in venture capital until the last two or three years.

We didn’t have any of that in the early days, right, Warren?

Warren Buffett:

No, that’s right.

Charlie Munger:

We were finding our own securities. And we were just looking at the public markets to see what was available in securities.

And when we started buying companies, there must have been 20 years when we didn’t buy more than one or two a year.

Warren Buffett:

Yeah. They were fairly few and far between. And we didn’t have the money to buy very big ones, either.

I mean it was a big deal when we bought Associated Cotton Shops for what, in effect, was 4 million, or when we bought Hochschild Kohn when we had to come up with 6 million of equity, as I remember, for that deal.

And National Indemnity, itself, was 7 million for National Indemnity, and I think a million-4, a million-7 for National Fire Marine. And I mean that was all we could handle in those days.

So the snowball has, you know, it’s built up as it’s gone down the mountain. And we hope there’s a lot of mountain left and a lot of wet snow, and we’re looking for it.

Charlie Munger:

But it’s fair to say that we were rooting around for those opportunities. We weren’t sitting behind our desks and waiting for some commission salesman to come in and present us with opportunities to sign our name. I can’t think of anything we bought in the early days that way.

Warren Buffett:

No, no.

Charlie Munger:

Warren, you chased down Jack Ringwalt. Didn’t you go to him?

Warren Buffett:

Well, Jack Ringwalt, who ran National Indemnity, and some of you here in the room knew, Jack was a very interesting guy and a friend.

And Jack, for 15 minutes every year, would want to sell National Indemnity. Something would make him mad. A claim would come in or something of the sort.

So, for 15 minutes every year he would want to sell. And a friend of mine, Charlie Heider… who may be here today… and I had discussed this phenomenon of Jack being in heat once a year for 15 minutes.

And I told Charlie if you ever caught him in this particular phase to let me know.

And there was a day that Charlie called and said, “You know, Jack’s ready.” And I said…“Well, get him over here.” So, he came about 11:30 and we made a deal in that 15- minute zone.

And this is absolutely true. It’s a fascinating story, because Jack, having made the deal… and we really did make it in 15 minutes… Jack, having made the deal, really didn’t want to do it, and… but he was… he wouldn’t have backed out of a deal.

But he said to me after we’d shaken hands, he said, “Well,” he says, “I suppose you’ll want audited financial statements.” And if I’d said yes, he would’ve said, “Well, that’s too bad then. We can’t have a deal.”

So, I said, “I wouldn’t dream of looking at audited financial statements. They’re the worst kind,” you know.

And then Jack said to me, he says, “I suppose you’ll want me to sell my agencies,“ and, “— to you as well.” And I said, “Jack, I wouldn’t buy those agencies under any circumstances.”

If I’d said yes to that, he would have… that I wanted him to sell the agencies… he’d say, “Well, yeah, I wouldn’t be able to do it, Warren. We must have misunderstood each other.”

So, we went through about three or four of those. And finally, Jack gave up and sold me the business.

He was an honorable guy, because he really, I don’t think, wanted to do it, but we met down at Charlie’s office at 19th, I think, and Douglas, and Jack was about 10 minutes late picking up this 7 million for National Indemnity.

He was about 10 minutes late, because he was looking for a parking meter with a few minutes left on it.

And that’s when I knew he was my kind of guy.

Charlie Munger:

But at any rate, this process is not easy, and practically anything where you sit behind that desk and this wonderful deal flow is just coming by, you’re in a very dangerous seat.

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