When opportunity comes, you have to move.
That was one of the simple life lessons that Warren Buffett imparted during the six-hour-plus annual meeting of Berkshire Hathaway shareholders on Saturday.
The advice came when Buffett was addressing a question about how he decides what to do with Berkshire’s float from the insurance operation. The question prompted Berkshire’s chair and CEO to recount a story he’s told at previous meetings about buying specialty insurer National Indemnity Company from a friend named Jack Ringwalt during a 15-minute meeting back in 1967.
“Once a year, [Ringwalt] would get mad at regulators” or some other problem would prompt him to declare he wanted to sell NICO, Buffett said, reporting that he and Vice Chair Charlie Munger were used to this occurrence. “Charlie called in one day and he said Jack was in heat again,” he said, referring to this agitated state that came over the former NICO owner regularly.
Bring him over, Buffett said.
At the subsequent meeting, Buffett asked Ringwalt to name his price, which turned out to be $50 per share. Despite Ringwalt having some immediate second thoughts, which Buffett described in colorful detail, the deal was done within minutes. Buffett told Ringwalt that he didn’t want to see audited financials or have any other strings attached to finalizing the transaction, he recalled, explaining that the potential seller mentioned those obstacles to try to back out of the deal and save face.
“You do have to be mentally prepared to do something when it makes sense, and do it big time, and do it instantly. And then you have to be sure you’ve got the resources to do it.”
Warren Buffett, Berkshire Hathaway
“The one thing you have to do is be prepared when opportunity comes. You really do have to just move. And fortunately I operate in an environment—and I wouldn’t operate in any other environment; I’d get out of there—but I operate the environment where I can do it,” Buffett said. He added that “it would be crazy of the board to say we want to set up to committee to review every acquisition and all that.” In that situation, “I would say that that’s fine, but I’ll work with somebody else,” he said. “I have other things to do with the rest of my life.”
Said Buffett, “There’s so much luck” involved in dealmaking. But “you do have to be mentally prepared to do something when it makes sense, and do it big time, and do it instantly. And then you have to be sure you’ve got the resources to do it.”
Doing It Big Time, Again
At an earlier point of the meeting, Buffett provided some information about how his latest deal came about—the $11.6 agreement to buy Alleghany Corporation—just weeks after he had written in his annual letter to shareholders that there was nothing exciting out in the market to acquire or to add to Berkshire’s investment portfolio.
Confirming the backstory of the deal set forth in a recent public filing, and providing a few more details, Buffett noted that the Berkshire annual letter was dated Sat., Feb. 26. One day before, Feb. 25, Buffett’s assistant Debbie Bosanek retrieved an email that was sent to Buffett from Alleghany’s leader.
“She brought it in—actually she puts a bunch on the edge of her desk and I collect them occasionally—and there was a note just a few lines long from a fellow that had been a friend of mine who worked for Berkshire many years ago,” he said, referring to Joseph Brandon, CEO of Alleghany and the former CEO of Berkshire’s General Re Corporation. (See related article, “How Warren Buffett Does a Deal: Alleghany Merger Backstory.”
“I’ve been following Alleghany Corp for 60 years… I have four big file drawers full of them because it’s an interesting company… A lot of companies have interested me. So, I know a lot about Alleghany Corp. And Joe said, ‘This is my first annual report as CEO and I just wanted to send it along to you. Just like you write for your sisters,’ he says, ‘I write this report as if I’m writing to you,'” Buffett said. Buffett had mentioned earlier during the course of this year’s annual meeting, and at prior annual meetings, that he writes his letters as if he is telling the story of what’s happening at Berkshire to his sisters.
Continuing his description of how the Alleghany deal unfolded, Buffett said, “I sent a note back to Joe and I said, ‘I’m going read it over the weekend…, which was true. I looked forward to reading it.” He also told Brandon he was going to be in New York, where Alleghany is headquartered, on March 7, suggesting a meeting. “‘I’d like to see you, and I think I may have an idea,'” he recalls writing to Brandon.
“I didn’t have that idea that day before… This thing just happened to come in on Friday the 25th… If he hadn’t sent me the note, it never would have occurred to me… It wouldn’t have happened except for the fact that Joe had wanted to send me along this annual report that he just written….”
“I didn’t call up investment bankers and say, ‘will you prepare me a report on this, [or] what’s your advice…?’ I knew we’d buy Alleghany at the price we offered. If it was of interest to Alleghany, fine. If it wasn’t—but otherwise, if that email hadn’t been sent, we would not have made an offer for Alleghany.”
(Editor’s Note: Buffett also explained why Berkshire spent billions to buy 14 percent of Occidental Petroleum, describing gambling casino-like conditions in the equities markets that set the stage for the activity in early March.)
An ‘Idiotic’ Price
Later, Buffett asked and answered his own question about the deal price, which ended up being $848.02 per share, saying that he had expected—and hoped—that someone would ask why such an “idiotic” figure was proposed.
Buffett explained that he actually proposed a price of $850, reduced for the fee payable to Alleghany’s financial adviser.
“It’s not play money. Somebody pays it.”
“They’re bound. They have to do it because Delaware law has developed in such a way that the directors are protected if they get expert opinions,” he said, referring to the obligation of Alleghany’s board to get a financial adviser’s opinion on the price. “I don’t fault anybody in the system. I just thought it might be useful actually maybe for Delaware judges someday, or a Delaware statute maker, or maybe people that are writing papers, who knows? But I suggest that if I’m willing to pay $850 per share for the place as is, [and] if the advisory fees are $10 million or $40 million, then it makes a difference to someone. And it’s always made a difference to us as the buyer.” (The actual advisory fee for Goldman Sachs was $27 million, or $1.98 per share, according to a recent Alleghany proxy statement filing.)
Buffett went on to share an entertaining story about how he once followed advice of Vice Chair Charlie Munger, who dreamed up a cat-and-mouse game that allowed Buffett to convince two investment major banking firms to take thousands rather than millions of dollars to deliver a fairness opinion for a deal Berkshire did in the late 1970s. Essentially, the scheme involved Buffett successively calling 10 major banks, asking for the advisory opinion, and proposing much lower fees than they were used to getting and stating that he would call a competitor next if the banker was insulted by the low figure.
“It didn’t hurt them. They billed us $60,000, and they went back and charged somebody else $2 million the next week.”
Buffett came back to the serious point of his digression. “I just thought it would be interesting at some point that people realize that it’s not play money. Somebody pays it,” he said.
The Future of Berkshire
After hearing the details of Buffett’s ability to move big time—and without board oversight—a shareholder wanted to know whether the same thing will be possible in the future when Vice Chair Greg Abel, head of Berkshire’s non-insurance operations, succeeds Buffett. Will he be able to make multibillion-dollar decisions without board approval?
“Well, my guess is that…the board [will] respond as people do. They’ll put some more restrictions or they’ll have some more consultation on a lot of matters, or some matters, than they do with me,” Buffett responded. “They won’t need to, but they’ll feel that they haven’t had the experience”—they haven’t seen Abel in action long enough—”and they’ll feel that the Delaware law protects them better” if they proceed in that manner, he said. “Incidentally, they don’t have directors and officers liability insurance… Virtually every company on the New York Stock Exchange has it, and we just don’t buy it,” he said, repeating a disclosure about D&O insurance that he has shared in prior years.