Berkshire Hathaway 2017 Annual Meeting Audience Question # 25

Why some business owners prefer to sell to Berkshire

Warren Buffett:

Well, we’ll go to Station 8.

Audience Member:

Hi, Warren and Charlie. My name’s Vicky Wei. I’m an M.B.A. student from the Wharton School of Business.

This is my first time to be in the first… in the annual meeting. I’m really excited about it. Thanks for having us here. My…

Warren Buffett:

Thanks for coming.

Audience Member:

My question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on, and which sectors are you most bearish on? Thank you.

Warren Buffett:

Yeah. Charlie and I do not really discuss sectors much. Nor do we let the macro environment or thoughts about it enter into our decisions.

We’re really opportunistic. And we… we, obviously, are looking at all kinds of businesses all the time. I mean, it’s a hobby with us, almost… probably more with me than Charlie.

But we’re hoping we get a call, and we’ve got a bunch of filters.

And I would say this is true of both of us. We probably know in the first five minutes or less whether something is likely to… or has a reasonable chance of happening.

And it’s just going to go through there, and it’s going to… first question is, “Can we really ever know enough about this to come to a decision?” You know, and that knocks out a whole bunch of things.

And there’s a few. And then if it makes it through there, there’s a pretty good… reasonable chance we’re going to… we may do something. But it’s not sector specific. It…

We do love the companies, obviously, with the moats around the product long… where consumer behavior can be, perhaps, predicted further out. But I would say it’s getting harder to
…for us, anyway… to anticipate consumer behavior than we might’ve thought 20 or 30 years ago. I think that it’s just a tougher game now.

But we’ll measure it and we’ll look at it in terms of returns on present capital, returns on prospective capital. We may have… we can…

A lot of people give you some signals as to what kind of people they are, even in talking in the first five minutes, and whether you’re likely to actually have a satisfactory arrangement with them over time. So a lot of things go on fast, but it…

We know the kind of sectors we kind of like to… or the type of business we’d kind of like to end up in. But we don’t really say, “We’re going to go after companies in this field, or that field, or another field.”

Charlie, you want to?

Charlie Munger:

Yeah. Some of our subsidiaries do little bolt-on acquisitions that make sense, and that’s going on all the time. And, of course we like it when…

But I would say the general field of buying whole companies, it’s gotten very competitive.

There’s a huge industry of doing these leveraged buyouts. That’s what I still call them.

The people who do them think that’s a… kind of a bad marker, so they say they do private equity. You know, it’s like (the sound in this part of the video is inaudible) a janitor call himself the chief of engineering or something. And…

But at any rate, the people who do the leveraged buyouts, they can finance practically anything in about a week or so through shadow banking. And they can pay very high prices and get very good terms and so on.

So, it’s very, very hard to buy businesses. And we’ve done well, because there’s a certain small group of people that don’t want to sell to private equity. And they love the business so much that they don’t want it just dressed up for resale.

Warren Buffett:

We had a guy some years ago, came to see me, and he was 61 at the time. And he said, “Look, I’ve got a fine business. I got all the money I can possibly need.” But he said, “There’s only one thing that worries me when I drive to work.”

Actually, there’s more than one guy’s told me that that’s used the same term.

He said, “There’s only one thing that bothers me when I go to work. You know, if something happens to me today, my wife’s left.

“You know, I’ve seen these cases where executives in the company try to buy them out cheap or they sell to a competitor and all the people…”

He says, “I don’t want to leave her with the business. I want to decide where it goes, but I want to keep running it, and I love it.”

And he said, “I thought about selling it to a competitor, but if I sell it to a competitor, you know, their CFO’s going to become the CFO of the new company, and there, you know, on down the line.

“And all these people who helped me build the business, you know, they’re… a lot of them are going to get dumped. And I’ll walk away with a ton of money, and some of them will lose their job.” He said, “I don’t want to do that.”

And he says, “I can sell it to a leveraged buyout firm, who would prefer to call themselves private equity, but they’re going to leverage it to the hilt and they’re going to resell it. And they’re going to dress it up some, but in the end, it’s not going to be in the same place. I don’t know where it’s going to go.”

He said, “I don’t want to do that.” So he said, “It isn’t because you’re so special.” He says, “There just isn’t anyone else.”

And if you’re ever proposing to a potential spouse, don’t use that line, you know.

But that’s what he told me. I took it well, and we made a deal.

So, logically, unless somebody had that attitude, we should lose in this market. I mean, you can borrow so much money so cheap. And we’re looking at the money as pretty much all equity capital.

And we are not competitive with somebody that’s going to have a very significant portion of the purchase price carried in debt, maybe averaging, you know, 4 percent or something.

Charlie Munger:

And he won’t take the losses if it goes down. He gets part of the profit if it goes up.

Warren Buffett:

Yeah, his calculus is just so different than ours. And he’s got the money to make the deal.

So, if all you care about is getting the highest price for your business, you know, we are not a good call.

And we will get some calls in any event. And we can offer something that… wouldn’t call it unique, but it’s unusual.

The person that sold us that business and a couple of others that have… actually it’s almost, word for word, the same thing they say. They are all happy with the sale they made, very happy.

And, you know, they are… they have lots and lots and lots of money, and they’re doing what they love doing, which is still running the business. And they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position.

And that’s… in their equation, they have done what’s best. But that is not the equation of many people, and it certainly isn’t the equation of somebody who buys and borrows every dime they can with the idea of reselling it after they, you know, maybe dress up the accounting and do some other things.

And… but there… when the disparity gets so wide between what a heavily debt-financed purchase will bring as against an equity-type purchase, it gets to be tougher. There’s just no question about it. And it’ll stay that way.

Charlie Munger:

But it’s been tough for a long time, and we’ve bought some good businesses.

Warren Buffett:

Yeah. Yeah.

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