2004: How will Berkshire compete with Private Equity?
AUDIENCE MEMBER: My question is your outlook on buying companies. You have taught us when stocks are priced high, and companies are priced low, then buy companies.
In the 1960s and ’70s, we did see the rise of the conglomerates. Then came in the pure industry plays. Now, we see a huge amount of money in private equity. And somehow private equity is competing for buying companies.
So my question is, what is your outlook on the future of the buyout and the buying company industry?
WARREN BUFFETT: Yeah, you’re absolutely correct that the private equity funds are a form of competition with Berkshire in buying businesses.
We don’t really seek to buy businesses cheap, because you’re not going to get the chance to do that. We haven’t been able to do that.
We do get occasional chances to buy them at what we would regard as fair value. You’ll never buy companies as cheap as stocks sometimes get. I mean, sometimes stocks sell for very low valuations compared to intrinsic value.
Businesses just don’t do it. I mean, the reason is the prices of stocks, like those junk bonds we talked about earlier, are set in an auction market, and that market can do extreme things. But businesses are sold in a negotiated transaction, and that doesn’t get as extreme.
Nevertheless, our preference — our strong preference — is that we would rather buy businesses at fair prices than stocks even a little cheaper. And the private equity funds are our competition.
On the other hand, we have bought a reasonable number of businesses in recent years, and we’ll buy more in the future.
If somebody wants what we are offering, you know, we are somewhat one of a kind, in that we can — we will buy a business, and the people that sold it to us, if they built that business, are really able to run it as if it’s their own indefinitely in the future. So they —
If they have a tax reason, if they have a family situation, or whatever, where they want to sell some business they love, and they don’t want to auction it off like a piece of meat, and they don’t want some guy buying it and then leveraging it up, and then reselling a couple years after changing the accounting or something of the sort, they come to us.
And they know they’ll get the result they want. And that happens periodically.
It doesn’t enable us to buy super bargains or anything like that. It just doesn’t work that way. But it does let us put the money to work at a sensible rate.
There will be more people like that. Unfortunately, we need big businesses, and, you know, they don’t come along every day. But as I’ve said, when they — if you find that kind of owner —
If I owned a business that was big, and maybe my father had started, my grandfather had started, and I worked a long time for it but for one reason or another I had to monetize it, you know, I would sell to Berkshire.
It’s very simple, because I wouldn’t regard the carving up of it to get perhaps the highest — a higher price — which might or not — might not be higher — but I wouldn’t regard that as the ultimate goal in life.
I think it’s kind of crazy, you know, to spend — I think it’d be kind of silly to auction off your daughter to whatever, you know, whatever man is willing to pay the most for her. And I feel the same way about a business you’ve created lovingly over decades, and decades, and decades.
And we will buy some more. It’s a matter of luck whether it happens in any given quarter, or even any given year.
But there’s really no one else can quite make the promises that we can make. I mean, the degree of ownership that I have in Berkshire, and the way I’ve got it set up for the future, where none has to be sold, you know, my promises will probably be about as good as you can get in that arena.
Most big companies simply can’t do that. If their board of directors, you know, decides they wanted to have a pure play, as you put it, in something. You know, what can be done about it?
I tell perspective sellers basically, “I’m the only one that can double-cross you.” I mean — and I can double-cross them. I mean, if I, the next day, want to pull something on them, I — it’s not contractual, what I’ve said to them, in all probability.
But nobody else can. We’re not going to get some management consultants in, and they say you ought to rearrange the business, or we’re not going to get Wall Street dictating to us.
And that’s, I think, a significant advantage over time. I think it’ll enable us to buy businesses, but we do have a lot of competition, as you point out.
CHARLIE MUNGER: Yeah, it’s been interesting, though, that we’ve had this private equity competition for a long time, and one way or another we’ve managed to buy a few things. (Laughter)