The Warren Buffett Way: The World’s Greatest Investor

(Rick Simeone) #1

44 THE WARREN BUFFETT WAY


until the year she died at the age of 104. “One piece of wisdom she im-
parted,” Buffett wrote, “was ‘if you have the lowest price, customers will
f ind you at the bottom of a river.’ Our store serving greater Kansas City,
which is located in one of the area’s more sparsely populated parts, has
proved Mrs. B’s point. Though we have more than 25 acres of parking,
the lot has at times overf lowed.”^4
In January 1986, Buffett paid $315 million in cash for the Scott &
Fetzer Company, a conglomerate of twenty-one separate companies, in-
cluding the makers of Kirby vacuum cleaners and World Bookencyclo-
pedia. It was one of Berkshire’s largest business acquisitions up to that
point, and has since exceeded Buffett’s own optimistic expectations. It is
a model of an organization that creates a large return on equity with
very little debt—and that is one of Buffett’s favorite traits. In fact, he
calculates that Scott Fetzer’s return on equity would easily place it
among the top 1 percent of the Fortune 500.
Scott Fetzer’s various companies make a range of rather specialized
(some would say boring) industrial products, but what they really make
is money for Berkshire Hathaway. Since Buffett bought it, Scott Fetzer
has distributed over 100 percent of its earnings back to Berkshire while
simultaneously increasing its own earnings.
In recent years, Warren Buffett has turned more and more of his at-
tention to buying companies instead of shares. The story of how Buffett
came to acquire these diverse businesses is interesting in itself. Perhaps
more to the point, the stories collectively give us valuable insight into
Buffett’s way of looking at companies. In this chapter, we have space
for an abbreviated visit to just three of these acquisitions, but that is by
no means all. To illustrate the wide range of industries within Berk-
shire, here are a few examples of recent acquisitions:



  • Fruit of the Loom, which produces one-third of the men’s and
    boys’ underwear sold in the United States. Purchased in 2002 for
    $835 million, which, after accounting for the earned interest on
    assumed debt, was a net of $730 million.

  • Garan, which makes children’s clothing, including the popular
    Garanimals line. Purchased in 2002 for $270 million.

  • MiTek, which produces structural hardware for the building in-
    dustry. Purchased in 2001 for $400 million. An interesting as-
    pect of this deal is that Berkshire now owns only 90 percent of

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