The story of Rose Blumkin (“Mrs. B.”) is almost legend at this point in the study of value investing and Buffett. Her story is quite amazing if you have never read it. Featured in both biographies of Buffett (The Making of an American Capitalist and Snowball).
Buffett’s due diligence and deal making consisted of reviewing her tax returns ($15m per tax income), a one-page sale contract and a handshake. The check came one week later and the deal was done. McKinsey was not hired to do market research, Goldman Sachs was not enlisted for a fairness opinion. Arthur Anderson (they existed back then) was not hired to do an accounting of the inventory. Lowenstein’s describes the diligence as follows,
“He did none of the usual checking, such as asking for an audit or examining the inventory, receivables, property titles. The average home buyer probably looks at more pieces of paper than Buffett did in spending $60m. His approach seems strange in a modern context, but it was in accord with the notion of J.P. Morgan Sr., that the principal judgements in business are those concerning character. In Buffett’s terms, if he couldn’t trust the Blumkins, why become their partners?”
A few years back I heard of a Canadian Berkshire. I was interested, but never did look into Prem Watsa. This past year he emerged prominently in the news due to his bid to acquire Blackberry. A little background is required. Watsa is the Founder and CEO of Fairfax Financial, a company that fits in the mold of Berkshire in that it is an insurance company with a large group of investments in operating companies. One of Fairfax’s large investments was in Blackberry. In fact, this investment was so large that in January 2012, Watsa was appointed to the board of Blackberry. From January 2012 to August 2013, Watsa was not only a significant shareholder, but a board member. In August, Watsa stepped down from his role on the board as Blackberry was pursuing options to sell itself and Watsa wanted to give himself the opportunity to bid if he desired. This bid eventually came in the form of a Letter of Intent on September 2013 to acquire Blackberry and take it private for $9 per share or $4.7B. Watsa discusses the six-week diligence period after the Letter of Intent was signed in his annual letter:
“To do our due diligence, we hired a very experienced team led by Sanjay Jha, who ran Motorola, Sandeep Chennakeshu, who was President of Ericsson Mobile Platforms, and John Bucher, who was Chief Strategy Officer at Motorola Mobility.”
To reiterate, this bid and subsequent diligence period comes after Watsa has been on Blackberry’s board for approximately 2 years and a large shareholder(~10%) in the company. Experts are hired, diligence is conducted, and I presume reports are written. In the end, the deal is changed from a buyout to a lending agreement. It should also be noted that Fairfax, now owning both the debt and equity of Blackberry, has chosen to sell some of its equity since the deal was struck.
I followed this deal because I was interested in learning more about the Canadian Buffett. I was particularly peeked by the following comment:
“We wouldn’t put our name to such a high-profile deal if we didn’t feel confident that at the end of the day that our due diligence would be fine and we’d be able to finance it,” Watsa said in an interview.
Perhaps today is a different world than one in which Buffett could buy Mrs. B’s company on a handshake. But, I probably won’t refer to Watsa as the Canadian Buffett any time in the near future.
One additional tidbit I enjoyed from reading the story of 3G Capital–Dream Big (Buffett’s partners on the Heinz acquisition). 3G was also the firm that acquired Anheuser-Busch, but originally started with a Brazilian brewer. One of the partners describes his market research as follows:
“I was looking at Latin America and who was the richest guy in Venezuela? A brewer (the Mendoza family that owns Polar). The richest guy in Colombia? A brewer (the Santo Domingo group, the owner of Bavaria). The richest guy in Argentina? A brewer (the Bembergs, the owners of Quilmes). These guys can’t all be geniuses, I thought, it’s the business that must be good.”
These few stories illustrate a broad point about investing.
Keep it simple.