Category Archives: Acquisitions

Warren Buffett says to be fearful when others are greedy, and greedy when others are fearful.

When it was recently announced that Suntech, the largest producer of solar panels across the world, was about to go bankrupt, I never imagined that the current rumor was about to begin.

But as of right now, this is just a rumor…

If you were ever to describe Warren Buffett, being a bargain hunter certainly fits the bill. If there are a lot of people running away from a specific investment type, Warren Buffett is usually running toward that investment.

But he doesn’t just buy on impulse. He’ll make sure there is an undervalued business before he buys.

That’s why the current rumor going around is that Warren Buffett might be interested in buying Suntech out of bankruptcy. Again, this is not an official announcement. But the company’s stock has gone up about 50% over the last two days.

If Warren Buffett ever did choose to buy this business – and nothing is in the works as of yet – it would positively help solidify the solar industry.

It’s no secret that Warren Buffett already thinks highly of solar power and wind, and he looks at them as very attractive investments. He owns many wind and solar farms already.

If Buffett were to buy out Suntech, it would show that he believes this market is still profitable and that it will eventually bounce back over time.

If Berkshire Hathaway does make this acquisition, they would become the biggest producers of solar power all across the world. And it would happen overnight.

Back in 1969, billionaire investor Warren Buffett wrote a letter to his investing partners that is now quite famous. In this letter he told his investing partners that he was not able to find any value in the marketplace and he believed it best to return their money and dissolve the partnership.

In the letter he came to the conclusion that only two businesses possess relative value, and one of those was Berkshire Hathaway. As part of an option to his company liquidation, he offered the investing partners the choice of owning pro rata shares of both of these companies.

Warren Buffett’s tremendous personal wealth is evidence to the success of those who stuck with him. Plus, he is the antithesis to the typical greed you hear about on Wall Street, and he has pledged to the Bill and Melinda Gates Foundation a total of $30 billion.

Over the next 50 years, Warren Buffett has been a major powerhouse in the investing world. He is obviously the most famous investor the world has known, and certainly the most successful in the eyes of many. When the technology boom came along, he backed away because he didn’t understand this business model. Luckily or strategically, he was capable of avoiding the dot com bust altogether.

You know Warren Buffett owns stocks, he doesn’t invest in them. When he invests, he does so in the companies and the value that they bring. He’s also known to ignore the emotions and attention of the marketplace.

Warren Buffett has been buying newspapers as of late. It’s funny because this medium is looked at as yesterday’s media. But he has a specific way of investing in newspapers. He only buys small-market, hometown newspapers with a loyal following. Does he know something that the rest of us do not?

In the year 1986, Bill Kovach was hired by the Atlanta Journal-Constitution, and became their new editor. He was previously the Washington bureau chief of the New York Times.

This new appointment brought about a turbulent two years, and the investigative journalism brought two Pulitzer prizes and many more nominations. That’s not a normal occurrence for a newspaper like the Atlanta Journal-Constitution.

They proceeded to ramp up their reporting, and decided to cover more international and national news stories. They also covered critical business stories that revolve around the city of Atlanta. They even picked a fight with the mighty Coca-Cola. This resulted in a proud community, who enjoyed their vastly improve newspaper.

But like all good things, they must come to an end. And Bill Kovach was fired in November 1988.

The city was in an uproar, and they were very upset over this decision. There was even a protest march that went all away down Marietta Street, and went past the front of the newspaper’s office. Such important intellectual leaders like Pat Conroy and Morehouse professor Michael Lomax even participated in this event.

This situation became national news, and the newspaper owners, Cox Enterprises, were vilified in the media. The event gained a lot of attention, and all of it was overwhelmingly in favor of Bill Kovach.

But Cox wanted to return to its regular style of journalism. They weren’t interested in becoming a competitor of USA Today or the New York Times. So Bill Kovach was out. That’s just the way it goes sometimes.

Fuhrman Bisher, a sports reporter for the newspaper during that time, said: “Maybe now we can get back to covering Dixie like the dew” – the tagline of the newspaper.

The message in that saying is quite simple: the local news is still important and it still sells, and the local newspaper has to completely serve the market if it’s going to survive.

As a newspaper editor, you need to realize that a person could get their national and international news from so many different media sources at this point. But there aren’t many ways to get the local news, except for the local newspaper in many cases. There will always be a tremendous demand for comprehensive coverage of local business, local sports, local festivities and the local lifestyle.

It’s fairly straightforward at the empirical level: the life force of a newspaper is always going to be the advertising revenue. If you plan to give advertisers their money’s worth, you have to get in touch with their target audience. If the target audience is local readers, then you have to provide local information. It’s that simple.

According to the way Warren Buffett thinks, this is always going to be a profitable business model.

The media is saying that print newspapers are dying, and national newspapers and news magazines are having a tough time surviving at this point because of the Internet.

At the time of this writing, Time Warner has done something practically unthinkable. They have spun off Time Inc., the company’s magazine portfolio, and turned it into its own standalone company.

In the meantime, Warren Buffett has shrewdly found value in a largely ignored investment that the rest of Wall Street seems to have overlooked. At the time of this writing, Berkshire Hathaway currently owns 28 newspapers. It wouldn’t be surprising if other people seem to recognize this opportunity and eventually follow suit.

Renowned investor, businessman and philanthropist Warren Buffett has actually sent a few of his best aides to the country of Ireland in order to meet with the Irish Minister for Energy, named Pat Rabbitte. The aides are meeting in order to discuss a possible sale of Irish State assets.

“Two meetings were held with different representatives of the Berkshire Hathaway group. In both cases these were introductory meetings organized at the request of Berkshire Hathaway,” we learned from a government source who told the Sunday Independent.

Bord Gais Energy, a national gas company of Ireland, is on the selling block for an estimated cost of $1.3 billion.

This is actually one of several government companies that are currently up for sale. Some of the other companies are Coillte, which is the Irish forestry organization, and the national lottery license is also for sale.

In the past, Warren Buffett has been burdened by Irish investments. During the year 2008, he bought $318.5 million worth of shares in two different Irish banks. The shares eventually tanked, and the value of those stocks dropped to $35 million.

In his recent letter to shareholders, billionaire investor Warren Buffett tells us that he now owns around 67% of an operation that runs Prudential, the Irvine-based real estate chain.

Buffett said that he will “purchase the balance of those operations within five years.”

Until the shareholder letter, there has never been a time where any of the details of the partnership between Brookfield Asset Management and Berkshire Hathaway have been revealed.

Back in October of 2012, Brookfield and Warren Buffett told the world that they were going to team up and create a new national real estate chain known as Berkshire Hathaway HomeServices. The headquarters of this company is in Irvine, California.

According to the shareholder letter released by Warren Buffett on March 1 of 2013, the existing real estate company of Berkshire Hathaway known as HomeServices of America, actually purchased the 67% of the Prudential and Real Living franchise operations. Together, both of these companies license 544 brokerage companies on a national scale.

The new chain known as Berkshire Hathaway HomeServices is soon-to-be operational later on in 2013. The Prudential franchises are going to convert to the new brand as well. The other Prudential offices are going to have the opportunity to switch brands or continue to operate under the Prudential name, as well as the Rock of Gibraltar logo.

The new chain actually unveiled its new logos and colors during the past week at Prudential Real Estate’s Las Vegas sales convention.

The official colors are Cabernet and cream the company tells us. They will also have a very simple font and design for their new business cards, yard signs and logos.

Officials from the company say that the new look has a timeless quality, reflecting “the brand’s classic heritage.”

“The new Berkshire Hathaway HomeServices logo exemplifies strength and elegance,” said chairman and CEO of HomeServices of America Ron Peltier.

“The Berkshire Hathaway HomeServices brand identity is smart, distinctive and versatile for all markets and price ranges,” said Earl Lee, CEO of HSF Affiliates LLC.

BH Media Group, a subsidiary of Warren Buffett’s Berkshire Hathaway, is currently buying the Tulsa World, we learned from Steve Jordan. The terms of the sale have not been disclosed as of yet.

The Lorton family has owned the Tulsa World newspaper “for four generations,” writes Jordan. It’s been nearly a month since Warren Buffett purchased his last daily newspaper. He bought the Greensboro News & Record nearing the end of January.

Robert E. Lorton Jr., Chairman of World Publishing Co. is quoted by Jordan as saying: “the newspaper business has become a difficult business model within a changing society and in particular for local family-owned newspapers. BH Media Group presents the best opportunity to continue a local paper that will serve this community, our friends and neighbors.”

Lorton is also quoted as saying that the sale “assures a secure future for a local Tulsa World newspaper.”

In a Boston Globe column that was released last week, newspaper business analyst Ken Doctor said to “expect an announcement of another Berkshire Hathaway newspaper acquisition – as soon as Monday.”

Now that Berkshire Hathaway has purchased the Tulsa World, Buffett and company currently own 27 daily newspapers and a grand total of 269 publications in all. Buffett purchased all but one of the Media General newspapers this past May. He believes in newspaper properties that “intensively cover their communities.” BH Media Group had to close down the Manassas News & Messenger this past December.

Very recently, 3G Capital and Warren Buffett have teamed up to purchase H.J. Heinz. And yes, 3G is a private equity firm.

Warren Buffett isn’t really a big fan of private equity, and in the past he has said that these firms are short-term financial engineers who “don’t love” the companies that they purchase. He has even bragged that he’s never previously purchased a company from one of these private equity firms.

So what is the public supposed to think of the idea that Warren Buffett has now teamed up with 3G Capital Partners, a private equity firm? They are jointly purchasing H.J. Heinz Co. in the total amount of $28 billion.

When you really think about it, this move is kind of hypocritical.

In the press, 3G Capital has been labeled a hedge fund manager as well as a private equity firm. Both of these statements are correct from a factual standpoint. The company oversees several private equity funds. The most recent fund had a gross asset value as of last October in the amount of $1.12 billion. Here’s the way 3G describes their family of funds in the company brochure:

The 3G Special Situations Funds’ objectives are to achieve superior long-term capital appreciation by making either controlling or non-controlling (but, in such cases, typically influential) investments in a small number of companies operating fundamentally good businesses with easy to understand business models that are being undermanaged or to which the Adviser believes it can add meaningful value. The 3G Special Situations Funds focus on leveraged acquisitions, recapitalizations, and acquisitions of controlling or influential stakes of businesses in industries where the Adviser has either operating experience or a strong network of contacts within the industry.

It currently appears that 3G charges 20% carried interest for all of these funds, and the management fee is around 1 to 2%. About one quarter of company capital comes from firm principals, and the rest of it comes from a minute group of high net worth Brazilian investors (and there’s even a smaller group of institutional investors).

3G Capital manages a few different small hedge funds through diversified strategies. Some of their funds hold stakes in companies such as SandRidge Energy, Goldman Sachs and Google.

That’s why it might be smarter to describe this company as an alternative investment platform, that also features varying strategies. Basically the way you may categorize Kohlberg Kravis Roberts & Co. and The Blackstone Group.

Those people familiar with 3G aren’t often comfortable with these comparisons. However, the company certainly does have a much grander investment horizon than your average and ordinary private equity firm. So in a sense, 3G resembles Berkshire Hathaway more than KKR or even Blackstone.

It hasn’t been possible to determine the investment lifecycle of a private equity fund from 3G, as a way to compare it to the industry-standard of 10 years. As a matter of fact, one source tells us that there might not even be one. If that is the truth, then you’re looking at one major distinction between Berkshire Hathaway and 3G.

If that statement isn’t true, then the only major difference between the 3G and Berkshire is that they raise their money by tapping into rich Brazilian friends instead of university endowments and public pension funds in the United States.

3G certainly doesn’t own any publicly traded securities the way Berkshire Hathaway does (which tells us that there has to be some viable path to investor liquidity).

Looking at the private equity track record of the firm doesn’t seem to remove the label either. As an example, 3G purchased Burger King in 2010 mainly by leveraging bank debt, then returned the money back to the public two years later through a reverse merger (instead of the usual IPO). 3G still has a major stake in Burger King, but there’s nothing novel in regards to a private equity firm remaining in control of our portfolio company three or four years down the line of the initial purchase.

When talking about bank debt, even the deal with H.J. Heinz is technically a leveraged buyout. There’s no question that it includes more equity than a typical mega-LBO with Berkshire Hathaway putting up as much as $12 billion and $13 billion (as well as 3Gs smaller equity slug), but the move will still keep billions of dollars worth of new debt of the books of Heinz.

Maybe Warren Buffett was only being hyperbolic when he speaks of his private equity contempt. Think about this for a second… if he truly believed the things he said, then he would have found another partner with whom he would purchase Heinz.

It’s almost crazy to mention that you have regular deals, and then you have Warren buffet style deals. And when looking at a Warren buffet style deal, the acquisition of H.J. Heinz for $23 billion certainly fits the bill.

Warren Buffett is known specifically for choosing a target that he like to buy, letting them know his price and then ultimately acquiring that target without doing too much bargaining in the process. Would you like to take a look at a few examples? Then check out the Berkshire Hathaway acquisitions of Wrigley’s, Burlington Northern Santa Fe railroad and Lubrizol. In every instance, once Warren Buffett came to the table, each company lost interest in looking for any other bidders. That’s a powerful position to be in.

As of this time, it’s difficult to know the full story around the Heinz acquisition, and we have no clue how they looked at other suitors when trying to make sure that their shareholders will get the best deal. Once the proxy statement for the deal is filed, we will certainly learn more information. But as I’m sure you can imagine, this is already a very unusual deal from the beginning. If you’d like to see further evidence, then you can take a look at the last Friday morning agreement filed in regards to this deal.

One occurrence you need to be aware of is that there is no “go shop” provision that will allow Heinz to search for other bidders once the deal was announced. This type of provision is very common when a private equity deal takes place, and it also happens in some strategic deals as well, since it prevents the target from negotiating with any other bidders prior to announcing the deal.

But once the deal is announced, the target company can do a market check and look to see if there are any other bidders. If another bidder does come along, then the termination fee they would have to pay in order to acquire the company is actually lower than when there is no go shop provision in place.

There are some very good reasons for this particular type of mechanism. For starters, it will let the board of directors feel comfortable that it is actually receiving the best reasonable price that is available. Secondly, even though a ghost out provision is not mandated under the laws of Delaware, companies feel like it helps them satisfy their Revlon duties, which basically requires that a board of directors receive the highest price that is reasonably available when they sell a company.

You may have already gathered this, but there is no go shop provision in place during the Heinz deal. The company has only negotiated with 3G Capital and Berkshire Hathaway, according to all reports that are circulating. If there were another bidder to possibly come along, they would have to pay a $750 million termination fee, and there would also be another $25 million worth of expenses. That estimates to roughly 3% of the total transaction value, and this is a standard for a deal like this. But if a go shop provision were in place, it would typically be about three times less than this amount. No matter what way you look at it, we are still talking about a very large sum of money.

The deal is ultimately structured a lot more as a private equity deal than a strategic deal. 3G and Warren Buffett are financial buyers, and this deal specifically depends on the financing. They have jointly negotiated a common right in the private equity deals that if there is a failure and financing, Heinz will be able to sue them and they will be forced to obtain the financing. But if it is still not available, both buyers will be able to walk away from this deal, even though they would have to pay Heinz a whopping $1.5 billion.

I’d like to make a note that both Berkshire Hathaway and 3G capital also negotiated a very unique financing extension provision that will actually be for Heinz from forcing the payment of this see immediately if there is an event that financing failure takes place. This will allow the buyers to delay the termination and force the banks to finance this deal. We are going to officially call this new requirement The Ketchup Provision.

Getting back to the main story, it appears that Heinz has purposely gone out of its way to limit their options. Do you have any idea why they would do this?

One potential reason is simply the market dynamics, meaning that 3G and Warren Buffett didn’t allow a go shop provision with the deal. Since mergers are often driven by the market, the very common go shop provision use in situations like this would have provided Heinz a good reason to draw a line in the sand. All in all, it would show the shareholders that this truly is the best deal available to them.

There is also another potential reason that may come into play – the Heinz peculiarities. The company is actually incorporated in Pennsylvania, unlike most major American corporations that incorporated in Delaware.

The law of that state is created to provide total latitude to boards when it comes to deciding whether or not they should reject or accept the takeover offer. Under the Pennsylvania statute, the board is not required to take the shareholders into consideration as their main deciding factor when they choose to sell the company. The directors are able to base their decision on the interests of the “employees, suppliers, customers and creditors of the Corporation, and upon communities in which offices or other establishments of the Corporation are located.”

The overall effect of this particular statute is there to repudiate the Revlon rule in Delaware. Heinz, which is a Pennsylvania company, has no obligation whatsoever to take the highest price possible for their shareholders, and the courts in Pennsylvania have rejected this doctrine specifically. Instead, there are other interests such as community that come into play. (Mister Buffett and 3G must agree to section 7.15 that states that Heinz headquarters must stay in Pittsburgh, the company has to continue to retain the name Heinz, and they have to preserve the charitable commitments and heritage of this business. They also have to honor the naming rights of Heinz Stadium.)

Based on the advice of Heinz lawyer – Wachtell Lipton for special committee and Davis Polk for the company – they are told that the board doesn’t have to make shareholders their main requirement, and since this isn’t the state of Delaware, they can take other interests into consideration and still justify the sale to 3G and Warren Buffett.

Deals like this have been made before under great criticism. During the year 2009, Apax Partners purchased the Bankrate under similar circumstances. Since the Corporation was based out of Florida, they did not have to adopt the same safeguards you would normally come across during a private equity deal, mainly because the Florida laws did not require it. The board of Bankrate chose to go with the letter of the law instead, and they were also advised by Wachtell.

So what it all boils down to is this… If there is another bidder interested in purchasing Heinz, since there is no go shop provision in place, the Board of Directors can legally turned down this bid even if it is higher. The board can easily justify this rejection as the better move for Heinz if it feels the original deal upholds the interests of the community.

In reality, the state of Pennsylvania truly assisted Warren Buffett in his latest blockbuster deal.