Buying a Business 53“Charlie and I think we understand the company’s economics and
therefore believe we can make a reasonably intelligent guess about its
future.”^12 Gillette issued $600 million in convertible preferred stock to
Berkshire in July 1989 and used the funds to pay down debt. Buffett re-
ceived a 8.75 percent convertible preferred security with a mandatory
redemption in ten years and the option to convert into Gillette com-
mon at $50 per share, 20 percent higher than the then-current price.
In 1989, Buffett joined Gillette’s board of directors. That same year,
the company introduced a highly successful new product, the Sensor. It
was the beginning of a turnaround. With Sensor sales, Gillette’s pros-
perity magnif ied. Earnings per share began growing at a 20 percent an-
nual rate. Pretax margins increased from 12 to 15 percent and return on
equity reached 40 percent, twice its return in the early 1980s.
In February 1991, the company announced a 2-for-1 stock split.
Berkshire converted its preferred stock and received 12 million com-
mon shares or 11 percent of Gillette’s shares outstanding. In less than
two years, Berkshire’s $600 million investment in Gillette had grown
to $875 million. Buffett’s next step was to calculate the value of those
12 million shares; in Chapter 8, we’ll see how he went about it.
Gillette’s razor blade business is a prime benef iciary of globaliza-
tion. Typically, Gillette begins with low-end blades that have lower
margins and over time introduces improved shaving systems with higher
Figure 4.2 The Gillette Company market value.