History of Berkshire Hathaway

Berkshire Hathaway is a name that, despite its vast wealth and immeasurable influence, most average people don’t actually know. However, this multi-billion dollar conglomerate owns more than 50 businesses including household names like Dairy Queen, Fruit of the Loom, Duracell, and GEICO.

But there’s more to it than just that. In fact, Berkshire Hathaway has a surprisingly interesting history full of odd decisions, some mistakes, a few lucky draws, and more than a little bit of the common sense of its celebrity billionaire chairman Warren Buffett. And, it all started with two textile companies on the East Coast.

Hathaway Manufacturing and Berkshire Drummer Mills

The oldest of the two companies that would become Berkshire Hathaway was Hathaway Manufacturing Company, a cotton mill established in 1888 by Horatio Hathaway with money he earned as a whaler. The company was headquartered in Bedford, Massachusetts, and was quite successful until World War I, when the cotton industry began to decline.

1024px-manchester_new_hampshire_-_textiles-_pacific_mills-_barber-colman_high_speed_warper-_this_machine_is_using_345-_-_nara_-_518752The other company to make up this historic corporation was Berkshire Fine Spinning Associates, which was formed when four textile companies merged together under common ownership in 1929. Berkshire Fine Spinning Associates was owned by Seabury Stanton, a businessman who invested much of his own money in the corporation. It paid off though, and during its height Berkshire Fine Spinning Associates were responsible for about a quarter of the fine cotton textile production in the United States.

While Berkshire Fine Spinning Associates did slightly better than Hathaway Manufacturing during World War I, profits were very hit-and-miss and the industry bounced all over the place after the Great Depression. World War II brought some positive upswing as the company worked on uniforms for the military, but after the war it became clear that the industry was not stable.

Berkshire Hathaway, Inc. is born

Berkshire Fine Spinning Associates merged with Hathaway Manufacturing Company to form Berkshire Hathaway, Inc. in 1955. The new company was huge and had over 10,000 employees, around $120 million in revenue, and more than 15 plants totaling around six million square feet of industry space. However, despite this, the company’s financial performance plummeted.

The new corporation was headed by Seabury Stanton, whose background was centered in the actual industry rather than the complicated finances that came with running a corporation. Add to that the falling prices in cotton and increased competition from both international and local companies, and the future of Berkshire Hathaway was quite grim.

In fact, by the end of the 1950s, Berkshire Hathaway had sold more than half of its plants and laid off a large number of workers. Many analysts wrote off the corporation as doomed and turned their attention to other avenues, but the company continued to limp along.

In 1961, Berkshire Hathaway was forced to cut its work week to four days a week at several plants and continue to show losses year after year.

Warren Buffett joins Berkshire Hathaway

In 1962, Warren Buffett, who was 32 at the time, began to take an interest in Berkshire Hathaway and soon began to buy shares with the belief that the company’s value was much higher than the current price indicated. According to interviews, he had hoped to sell them back at a profit and, after being shorted on a purchase offer from Stanton, instead held on to the shares and continued buying more and more of them. At the time he started buying, the shares were valued at around $7.50 per share.

warren_buffett_in_2010By 1963, Buffett and his associates were the largest shareholders in the company and Buffett began to take a more active role in the company, much to the consternation of Jack Stanton, son of Seabury Stanton, who had taken over the company from his father.

Over time, Buffett and his associates began to slowly increase their shares until1965 when Buffett and his partnership owned enough stock to take over the company’s management. Stanton retired from the company during the leadership change, and Buffett placed Ken Chace as president. Chace was tasked with taking over the milling operations while Buffett turned his attention to the faltering financial side of the business.

By the time Buffett took the company over, it only had about 2,300 employees and two operative mills. During the next few years, Buffett slowly began to move the company’s base of operations to its current home in Omaha, Nebraska and quickly began to seek out alternate forms of revenue.

Diversification saves Berkshire Hathaway

As had been the trend since World War II, the textile industry’s cyclical nature continued to swing Berkshire Hathaway’s profits up and down from 1965 to 1967. Buffett, who wanted the company to be more stable, began to shop around for some additional companies to invest in to help stabilize Berkshire Hathaway’s bottom line.

Then, in 1967 the company made its first step away from textile business with the purchase of Indemnity Company and National Fire & Marine Insurance Company for $8.5 million. The Omaha-based insurance companies mostly handled automobile insurance, which was far more stable than the ups and downs of the textile industry.

In 1968, Berkshire Hathaway purchased Sun Newspapers, a group of Omaha weeklies—the first of several newspapers that Berkshire Hathaway would eventually own. And, a year later, the company expanded even further with the acquisition of Illinois National Bank & Trust Company of Rockford.

Buffett became the chairman of Berkshire Hathaway in 1969 and, seeing the stabilizing effect of the other businesses that the company had purchased, continued to diversify and expand. However, unlike other businessmen at the time, Buffett acquired companies whose management and products he liked, rather than buying companies that needed major changes or seemed exceedingly popular. This led to not only fame and fortune for Buffett, but also for Berkshire Hathaway who had, just over a decade earlier, had closed out the year with red ledgers.

Between 1969 and 1979, Berkshire Hathaway continued its expansion and diversification, mostly acquiring companies in the insurance industry, including the purchase of Wesco Financial Corporation in 1970 and some GEICO shares in 1976. Berkshire Hathaway also increased its newspaper business with the purchase of the Buffalo Evening News.

Berkshire finally quits textiles

Through the 1960s and 1970s, Berkshire Hathaway stubbornly held on to its textile operations, despite rising costs, negative profits, and foreign competition that produced products at prices that simply couldn’t be matched. It was thought that too much capital had been invested to simply quit.

Then finally in 1985, Berkshire Hathaway admitted defeat and closed its last textile mill down, bowing out of the industry which, nearly 100 years earlier, had been its bread and butter. The assets were liquidated, as no buyer could be found, and Berkshire Hathaway turned its attention to more lucrative businesses.

Investing begins to pay off

With the closing of the last textile mill, Berkshire Hathaway’s profits took off and during the rest of the 1980s, Berkshire Hathaway enjoyed exploding profits and made some monumental decisions and changes that would effect the company for years to come.

The first unusual decision was Berkshire Hathaway’s corporate philanthropy program which allowed shareholders to direct a portion of the company’s charitable contributions, with the goal of giving an “owner mentality” to all shareholders. The program was met with wild enthusiasm and has had more than 95% participation since its inception in 1982.

statistics-76197_960_720The following year, Blue Chip Stamps merged with Berkshire Hathaway. That same year, Berkshire Hathaway acquired 90% of Nebraska Furniture Mart, the largest home furniture store in the nation.

1985 brought about plenty of profits and changes other than finally shutting down Berkshire’s textile industry. Some notable happenings included the $320 million acquisition of Scott & Fetzer Company, which specialized in manufacturing and marketing; a 7 percent participation in Fireman’s Fund Insurance Company; and the establishment of Westco-Financial Insurance Company.

That same year, Berkshire’s insurance empire began offering big businesses insurance with the promise it was stable enough to back large claims. With multi-million dollar corporations needing assistance with rising risks and costs, Berkshire’s willingness to write property and casualty policies with $1 million (or higher) premiums resulted in an explosion of business for Berkshire Hathaway. From August 1985 to December 1986, the company recorded $184.4 million in net premiums for large accounts—a sector it had no business in the year before.

By August 1987, Berkshire Hathaway’s future was looking good. The Wall Street Journal reported that Berkshire Hathaway’s stock portfolio had blown past the DOW Jones average of 233.6% to a whopping 748% since the market’s surge began in 1982.

Then, on October 19, 1987, a day that became known as Black Monday in the history books, the stock market collapsed, resulting in a complete wipe of profit for most companies. Berkshire Hathaway, however, managed to weather the drop, despite purchasing $700 million worth of stock in Saloman Inc, a Wall Street investment company that relied heavily on the market, earlier that year. In fact, Berkshire reportedly recorded a 2.8% rise for the period.

By 1988, Berkshire Hathaway made a huge move in finally listing its stock on the New York Stock Exchange (NYSE) under the moniker BRK. While the stock had been previously traded in the over-the-counter market, the company formally listed it with NYSE in the hopes of reducing transaction costs for shareholders. When it was listed, it was the highest-priced stock at $4,300 per share—a significant increase from $7.50 per share when Buffett first began purchasing stocks in 1962. That decade alone, shares skyrocketed to $8,000 per share, and have continued to rise steadily ever since.

At the very tail end of the 1980s, Berkshire purchased a significant amount of shares in several companies including Gillette Company, USAir Group, Champion International Corporation, Borsheim’s and even $1 billion worth of shares in Coca-Cola, making Berkshire Hathaway the second largest shareholder.

Rocky waters of the 90s

Prior to the 1990s, Berkshire Hathaway focused primarily on merely investing in already-successful businesses. And, while that interest continues to this day, the mid 90s saw a shift from merely investing in businesses to purchasing and actually operating multiple companies itself. However, even during this shift, Buffett maintained a very hands-off approach to the companies that Berkshire Hathaway acquired, leading to more than a few problems during this decade.

One such issue came after the 1999 purchase of General Reinsurance Corporation, which Buffett bought for $22 billion. However, the transition in management was rocky, and all of the confusion led to General Reinsurance losing roughly $1.6 billion from underwriting losses.

As a direct result of those losses, Berkshire Hathaway’s net income dropped from $2.8 billion to around $1.6 billion in 1999, resulting in widespread criticism of Buffett’s investment philosophy and business sense. Many people called his insistence on holding stock foolish while others questioned his resistance to high-tech and internet stocks which swept the NYSE in the 90s. While the burst of the tech bubble in 2000 would vindicate Buffett, at the time he was seen as old-fashioned.

800px-geico_logo-svgBut, instead of worrying what others thought, Buffett continued his methods of acquiring companies he believed in. One of the most important purchases Berkshire Hathaway made was the $2.3 billion acquisition of GEICO in 1996, which helped Berkshire Hathaway’s insurance segment grow. As a result of this and other investing decisions, Berkshire’s stock skyrocketed to $36,000 per share in 1996.

Other acquisitions that made during the 1990s included the purchase of Helzberg’s Diamond Shops and R.C. Willey Home Furnishings in 1995, International Dairy Queen in 1998, and Allied Domecq (owner of Dunkin Donuts) in 1999.

Berkshire Hathaway in the 21st Century and beyond

Many people, Warren Buffett included, questioned whether Berkshire Hathaway could continue its exponential growth—which sometimes averaged more than 15 percent a year—through the decades. However, Berkshire Hathaway and its clever team showed absolutely no signs of slowing down.

In fact, in 2003, revenues for Berkshire Hathaway rose to $63 billion and three years later nearly eclipsed the $100 billion mark. In October of 2006, Berkshire Hathaway Class A shares reached the $100,000 per share mark, making it the first six-digit shares in U.S. investment history.

Berkshire Hathaway’s businesses expanded slowly in the 21st century, although there were numerous important acquisitions during this time. A few of these included The Pampered Chef, Fruit of the Loom, and Larson-Juhl in 2002; Clayton Homes and McLane Company in 2003; Business Wire, Forest River, Medical Protective Company, Applied Underwriters, and PacifiCorp in 2005; TTI, ISCAR, Russell Corporation, and Equitas in 2006; shares of Wrigley and GE in 2008; Burlington Northern Santa Fe Corporation in 2009; Lubrizol Corporation and preferred stock in Bank of America in 2011; and the purchase of HJ Heinz and Precision Castparts in 2015.

Although companies frequently change hands, as of 2016, Berkshire Hathaway was the sole owner of more than 50 companies, including several household name brands. It also owns majority or preferred stocks in countless other businesses.

Berkshire Hathaway’s Class A stocks sold for more than $200,000 per share in 2016, and as of that date the stocks had never been split. Berkshire Hathaway itself was valued at more than $200 billion in 2015, with profits going steadily up with each purchase. Where Berkshire Hathaway will go from there is anyone’s guess.