The Issuer is discussing with Berkshire the possibility of Berkshire acquiring an as yet unformed subsidiary of the Issuer, which would own a business and would own certain other assets to be determined but which may include shares of Berkshire common stock owned by the Issuer, in exchange for all of the Reporting Persons’ shares of Class B Stock in a transaction that would be structured to be a tax-free split-off. Berkshire and the Issuer have not agreed on any terms for such a transaction, and may not reach any such agreement. In particular, while Berkshire believes that such a transaction could be viable based on a valuation of Class B Stock and Berkshire’s common stock at prices prevailing on the date of this Amendment No. 8, a change in such prices may cause such a transaction to no longer be viable. Substantial other issues would also need to be resolved to proceed with such a transaction. If Berkshire and the Issuer do determine to enter into such a transaction, Berkshire believes that the transaction and related definitive agreement would be subject to approval by the Issuer’s board of directors, which to Berkshire’s knowledge has not yet considered any such transaction. Berkshire does not expect any transaction to be agreed upon unless the transaction will be of substantial economic benefit to both parties.This Malone-like move is a great idea as it will save in tax and simplify BRK's balance sheet not to mention make it more efficient.
This line from GHC's press release seems to indicate that this move was initiated by BRK.
WASHINGTON--(BUSINESS WIRE)--Feb. 12, 2014--This is interesting to me because I have been looking at Washington Post / Graham Holdings for years and could never really figure it out. It is one of those things that I really wanted to like and own a lot of. It is an owner-operator business with Buffett as the largest shareholder, and Don Graham ran the company very much in the style of Berkshire Hathaway.Graham Holdings Company (NYSE: GHC) is aware of the 13D/A filing made today by Berkshire Hathaway, Inc. regarding a potential split-off transaction with the Company. As indicated in the filing, the parties are in discussions and have not reached an agreement on terms of a potential transaction, and the parties may not reach such agreement. No transaction will be consummated unless it is in the interest of both parties.
But year after year of reading the annual reports, it just seemed to me that he wrote annual reports in the style of Buffett (honest, straight-talk) but I really couldn't find where he was operating under Buffett's values. He sort of seemed more like a caretaker of the family business. He wrote extensively about what he won't do (stupid things), but rarely wrote about anything that he actually did. Year after year, nothing seemed to happen. Of course, if you own a collection of very good assets, then you really don't have to do anything but we'll see that this was not the right way to go.
Anyway, when Washington Post sold the newspaper business and changed into Graham Holdings, it looked interesting because it was a major corporate action that changes the nature of the business. It may yet turn out to be a good buy for the long term. Maybe that will be another post at a later date.
But first, let's take a quick look at Don Graham's performance. He became CEO of Washington Post back in May 1991, so I will use that as the start date for his performance.
Don Graham Performance
According to Yahoo Finance, the adjusted price (which includes splits and dividends) of GHC stock in May 1991 was $132.85/share. It is now trading at $660/share. That's a five-bagger, so pretty nice. But the problem is that's over close to 23 years. That's only 7.3%/year. We don't have to go look at the outsider CEO performance table to see that this is not so great.
The S&P 500 index back then was 389.83 and it's now 1823; that's 7%/year excluding dividends. So that's pretty dreadful. No wonder Buffett wants out. It makes you think that Buffett's loyalty was with the newspaper and not with Don Graham.
Buffett's Other Long Term Holds
So I thought this might be a good time to look at Buffett's other holdings over the same time period. There aren't that many big holdings that he has held for the entire period from 1991 to now. He owned Capital Cities and Gillette back in 1991. Capital Cities is now part of Disney and Gillette is Procter and Gamble, so I'll use DIS and PG as proxies (even though Buffett doesn't own DIS; maybe he should have held on). His other large holdings were Coca Cola (KO) and Wells Fargo (WFC).
So here is how these stocks have done from May 1991 through now:
DIS: +10.4%/year ($7.66 -> $71.82)
PG: +11.7%/year ($6.35 -> $77.7)
KO: +9.9%/year ($4.54 -> $38.66)
WFC: +14.8%/year ($1.99 -> $46.00)
BRK/A: +14.0%/year ($8,750 -> $171,000)
S&P 500: +7.0%/year, excluding dividends! (389.83 -> 1823)
So the above is very interesting. It tells us what we already know, I guess:
- BRK has done pretty darn well over the past 23 years
- Buffett is a pretty darn good stock picker
- Don Graham is not such a great capital allocator/manager and clearly lags; it's no wonder Buffett wants to clean up the portfolio (especially with new managers able to allocate capital better than Graham (even though this deal doesn't raise cash)).
Other Berk-alikes?
Let's look at some of them (May 1991 through Feb 2014):
Alleghany (Y): +10.3%/year ($40.76 -> $376)
Markel (MKL): +16.6%/year ($17.25 -> $564)
Loews (L): +9.0%/year ($6.15 -> $43.80)
Leucadia (LUK)*: +15.2%/year ($1.10 -> $28.24)
*For LUK, I used year-end 1990 and 23 years since the Yahoo Finance price seemed off.
So we see that the good capital allocators do perform well over long periods of time.
Back to GHC
So if you want to evaluate GHC going forward, you have to start with how the CEO has done in the past. According to this measure, the answer is obviously not good. 23 years is a pretty long time. It just shows us how hard it is to perform well even with all the right values and good guidance; it's easy to talk the talk, but not many can actually walk the walk.
Implications for Berkshire Hathaway
This is actually great news for BRK. Not just because of the share buyback and dumping of a nonperforming asset, which of course is good. It sort of shows that there are no sacred cows. Buffett's sentimentality has it's limits. If you don't perform, out you go. Gimme back my shares!
I'm sure I'm not the only one noticing this but I do sense a big change going on over at Berkshire Hathaway.
And this leads to another topic that is related to this; another great book.
A Great Book!
I just finished reading Double Your Profits in 6 Months or Less by Bob Fifer. I read in an article related to the BRK/3G acquisition of Heinz that this book is handed out to 3G company managers and it is sort of a bible there. I put it on order at the local library and didn't really think much of it. I just thought it's another cost cutting book like many others. For whatever reason, I finally decided to read it and it is a really great book.
I thought it was just about cost cutting and things like that, but it is much more than that. For example, Fifer tells you to cut costs that don't produce anything but increase spending on things that do bring in business. He talks about how paying the high producers well may upset the non-producers, but it's better to keep the producers happy and non-producers unhappy than vice versa. I have seen this happen first hand.
Some things may seem a bit aggressive, like not paying bills until they are demanded multiple times and things like that. But there is plenty of really good stuff in here too.
I have never been a manager so don't spend too much time reading "how to" books on management so maybe this is not such a great book compared to others, but I have to say I was impressed. This is a well-known classic in the management world (an Amazon reviewer noted that Sandy Weill handed this book out after taking over Travelers in 1993).
Back to Berkshire Hathaway
So, how does this relate to Berkshire Hathaway? There has been a lot of press lately on the twenty-something Berkshire employee, Tracy Britt Cool. I found this to be very interesting. One of Cool's early projects was to learn how 3G turned around Burger King. So you can be sure that Cool read this book. If she is going to be working with folks at 3G, I don't have any doubt that she has read the book. Maybe she even carries it around (and extra copies of it) wherever she goes.
And here's the interesting part. Cool is seen now as sort of the fixer of Berkshire businesses, kind of like what David Sokol used to do.
Buffett has been known to purchase owner-operated businesses and just let them run the business. He never got involved in the various businesses, and he never bought turnaround situations. But we do know that Buffett will intervene to fix problems. As passive as he likes to be, he was very involved in Coca-Cola, for example, when they ran into trouble. He sent David Sokol in to fix NetJets when they couldn't stop losing money. Buffett used to be active in his younger days too; of course, BRK itself was an activist situation.
But now, BRK bought Heinz with 3G, folks that run businesses as described in the above book.
I think Cool was sent to Burger King to learn how 3G turned around the business partly to learn how 3G operates as BRK was going into business with them, but also partly for Tracy to learn how to turn a business around (so she can do it at BRK!).
So this is a bit different than the image of BRK buying stuff forever (he is trying to sell GHC now) and letting wholly owned businesses run independently (Sokol was sent to fix NetJets, Cool is sent to fix Benjamin Moore and possibly some other businesses).
Well, this is not to say that fixing up hasn't happened before; it probably has happened but out of the spotlight. We don't know what goes on in the various businesses. Buffett hates to lose money, so I'm sure similar things have happened in the past.
But now it seems to be happening out in the open. And the message is clear.
On the one hand, we can argue that BRK's private businesses are already highly efficient, or else Buffett wouldn't have bought them. And he wouldn't buy into businesses run by people who would create a lot of waste. But on the other hand, many businesses may not have been scrutinized closely in a long time; maybe there has been some waste built up over the years.
If that is the case, there can be a lot of value created from tightening things up.
Conclusion
I know the above doesn't sound very Buffett-like (having someone run around with a cost-cutting book micro-managing expenses), but times do change. Not too long ago we couldn't have imagined Buffett buying a tech stock or a capital intensive business. We couldn't imagine him hiring portfolio managers to manage BRK money. We couldn't imagine him splitting his stock. There are a lot of things that we couldn't imagine happening that did happen. So things do change.
And that's actually really good news, I think, for BRK. I know 3G and other private equity people are controversial; people tend not to like them. But as readers here know, I am not one of those. Of course there are good private equity people and bad ones, but I don't think there is anything categorically wrong with what they do (I know Buffett/Munger don't agree, but that's OK).
So I have no problem with this as long as it is fair and reasonable. Of course, there is such a thing as going too far, destroying morale and things like that. But I do think that sometimes a fresh set of eyes looking at stuff can be really good for an organization.
And of course, I have to say that this is all just speculation on my part. I am probably reading too much into these various things, but you know, that's what I do. We try to read between the lines to see how things may change going forward.
