Berkshire Hathaway 2013 Annual Meeting Audience Question # 46

How Warren and Charlie determine the fair price to pay for an acquisition

Warren Buffett:

Station 4.

Audience Member:

Ben Sauer from Shreveport, Louisiana.

Could you be more specific about what factors you considered when determining what a fair price was for an acquisition such as Heinz?

And also, what sources do you use to make judgments about major changes that will affect an industry?

Warren Buffett:

Well, we usually… we usually feel we’re paying too much. Isn’t that right, Charlie?

But we find the business so compelling, the management, our associates, so compelling, that we gag and we get there on the price.

But we… there is no mathematical… perfect mathematical… formula.

Looking back, when we’ve bought wonderful businesses that turned out to continue to be wonderful, we could’ve paid significantly more money, and they still would have been great business decisions. But you never know 100 percent for sure.

And so it isn’t as precise as you might think. Generally speaking, if you get a chance to buy a wonderful business… and by that, I would mean one that has economic characteristics that lead you to believe, with a high degree of certainty, that they will be earning unusual returns on capital over time… unusually high… and, better yet, if they get the chance to employ more capital at… again, at high rates of return… that’s the best of all businesses. And you probably should stretch a little.

Charlie and I have had several conversations where we were looking at a building… a business… which we liked, and were sort of gagging at the price, and Charlie or I will say, you know,

“Let’s do it,” even though it kind of kills us to pay that last 5 percent.

We did that with See’s Candy. Charlie was the one that said, “For God’s sakes, Warren, write the check.” I was the one that was suffering.

But it’s happened quite a few times, hasn’t it, Charlie?

Charlie Munger:

It almost always happens.

Modern prices are not cheap.

Warren Buffett:

No, no. And great businesses, you know, you’re not going to find lots of them, and you’re not going to get the opportunity to buy them and… although you do in the market.

The stock market will offer you opportunities for profit, percentage-wise, that you’ll never see, in terms of negotiated purchase of business.

In negotiated purchase of a business, you’re almost always dealing with someone that has the option of either selling or not selling, and can sort of pick the time when they decide to sell, and all of that sort of thing.

In stock markets, it’s an auction market. Crazy things can happen.

You can have, you know, some technological blip that will cause a flash crash or something.

And the world really hasn’t changed at all, but all kinds of selling mechanisms are tripped off, and that sort of thing.

So you will see opportunities in the stock market that you’ll never really get in the business market.

But what we really like, we really like buying businesses to hold and keep. We like buying cheap marketable securities, too. But particularly when you’ve got lots of cash coming in and you’re going to continue to have lots of cash coming in, you really want to deploy it in great businesses that you can own forever.

Charlie, anything?

Charlie Munger:

No. It… we’re sort of in a different mode now, and that has a great lesson, in that if we’d kept our earlier modes, if we’d never learned, we wouldn’t have done very well.

The game of life is a game of everlasting learning. At least it is if you want to win.

Warren Buffett:

We want to win.

Charlie Munger:

Yeah.

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