Berkshire Hathaway Inc.
Address:
1440 Kiewit Plaza
Omaha, Nebraska 68131
U.S.A.
Telephone: (402) 346-1400
Fax: (402) 346-3375
Statistics:
Public Company
Incorporated: 1889 as Berkshire Cotton Manufacturing Company
Employees: 35,000 (1996)
Assets: $35.5 billion (est. 1996)
Stock Exchanges: New York
SICs: 2711 Newspaper Publishing & Printing; 2731 Book Publishing & Printing; 6331 Fire, Marine & Casualty Insurance; 6719 Holding Companies, Not Elsewhere Classified
Company Perspectives:
Berkshire Hathaway Inc. is a holding company with an ever-increasing number of subsidiaries engaged in a myriad of business activities. Originally in textiles, Berkshire's reach has extended to insurance, retailing, manufacturing, publishing, and banking. Run by the dynamic Warren Buffett and his partner Charles Munger, Berkshire's name and reputation have become synonymous with its legendary investment portfolio, which has garnered excellent results far in excess of the S & P 500 and other indicators.
Company History:
Berkshire Hathaway Inc. and its subsidiaries are involved in several different businesses, the most significant of which is property, casualty, and auto insurance (GEICO) both directly and through reinsurance. Berkshire's other businesses include publishing (the Buffalo News, World Book, Childcraft; manufacturing (See's Candies, Campbell Hausfeld, Kirby, Fechheimer Brothers Company); retailing (Borsheim's, Helzberg's Diamond Shops, Nebraska Furniture Mart, R.C. Willey Home Furnishings, H.H. Brown Shoe Company, Dexter Shoe), and banking (Mutual Savings & Loan Association). Investing through its insurance subsidiaries, Berkshire often buys major shares of other publicly traded companies (American Express, Capital Cities/ABC, Coca-Cola, Gillette, Salomon Inc., Washington Post, and Wells Fargo); its chairman, Warren Buffett, is renowned for his expertise in selecting stocks with hidden appeal and staying power.
Humble Beginnings, 1889 Through the 1940s
Berkshire Hathaway Inc. began as a textile company, incorporated as Berkshire Cotton Manufacturing Company in Massachusetts in 1889. In 1929 several other New England textile manufacturers with much common ownership--Valley Falls Company, Coventry Company, Greylock Mills, and Fort Dummer Mills--merged into the company, which was then renamed Berkshire Fine Spinning Associates. This operation accounted for about 25 percent of the fine cotton textile production in the United States.
The glory years of the New England textile industry were numbered. The Great Depression of the 1930s contributed to its decline, as did competition from the South and overseas. Wages were lower in the South, and Southern workers had fewer alternatives than New Englanders for working in the textile mills. Further, market factors favored the coarser types of goods produced in the South, while wage differentials between the U.S. and foreign competition were often significant.
The New England textile business recovered somewhat during World War II, thanks to military demand for its products, and had a similar brief recovery during the Korean conflict. Still, the industry declined again after each of these upswings.
Diversification Is Good for the Soul, the 1950s and 1960s
In 1955 Berkshire Fine Spinning merged with Hathaway Manufacturing Company, a New Bedford, Massachusetts, textile maker dating back to 1888. The resulting company, Berkshire Hathaway Inc., had more than 10,000 employees and nearly six million square feet of plant space, but its financial performance was dismal. Berkshire Hathaway closed its extensive operations in Adams, Massachusetts, in 1958, and the same year sold its curtain plant in Warren, Rhode Island, to Pilgrim Curtain Company. The company recovered a bit the following year; a contract negotiated between Berkshire and its unionized employees in 1959 marked the first wage increase for New England textile workers since 1956.
By late 1959 and into 1960, the company was operating profitably and had a backlog of unfilled orders. Depressed conditions returned quickly, however, and in 1961 Berkshire cut its work week to four days at several plants and showed a loss for the year. In 1962 the company closed three plants in Rhode Island and showed even greater losses, due to depressed prices for its products. The financial hemorrhaging continued into the mid-1960s, despite cuts in Berkshire's workforce and an extensive plant modernization. In 1965 came a major change in the company's management: a partnership led by investor Warren Buffett had purchased enough stock to control the company, and in a resulting dispute Seabury Stanton, a 50-year Berkshire employee, resigned as president. Kenneth V. Chace, a vice-president who had been with the company 18 years, replaced Stanton. After Buffett gained control of Berkshire, its operations were gradually moved from New Bedford to Omaha, Nebraska, where Buffett was based.
Berkshire Hathaway was profitable in 1965 and 1966, but profits fell sharply as it began its 1967 fiscal year. The company was actively shopping for acquisitions to help it diversify, and in 1967 it entered the insurance business, buying National Indemnity Company and National Fire & Marine Insurance Company for a total of $8.5 million. Acquisition of the two Omaha-based companies, which primarily handled automobile insurance, was expected to help Berkshire overcome the cyclical nature of the textile business. In 1968 the company made another significant acquisition, of Sun Newspapers, a group of Omaha-area weeklies. In 1969 it bought Illinois National Bank & Trust Company of Rockford. Buffett, who became Berkshire's chairman in 1969, tended to acquire companies whose management and products he liked, rather than buying companies with the intention of making major changes. Both Buffett's company and his reputation as an expert investor continued to grow for decades to come.
From Medium to Large, 1970-79
Berkshire Hathaway's expansion and diversification continued at a steady pace. During 1969 and 1970 it bought controlling interests in Blue Chip Stamps (which owned See's Candies, a chocolate maker and retailer) and Wesco Financial Corporation, a savings and loan operator. Berkshire's insurance operations grew with the formation of Cornhusker Casualty Company as part of the National Indemnity group in 1970 and Lakeland Fire and Casualty Company (now National Indemnity Company of Minnesota) also as part of that group, in 1971. Additionally, in 1971, Berkshire acquired Home & Automobile Insurance Company (now National Liability and Fire Insurance Company) and in 1972 formed Texas United Insurance Company, which it later merged into National Indemnity. Four years later, in 1976, the National Fire & Marine subsidiary acquired its only wholly owned subsidiary, Redwood Fire & Casualty Insurance Company and Berkshire began buying shares in GEICO (Government Employees Insurance Company).
In 1977 Berkshire continued to acquire related businesses, this time Cypress Insurance Company, and then the Kansas Fire & Casualty Company was formed. The same year, it made another move into the newspaper business by purchasing, through Blue Chip Stamps, the Buffalo Evening News, a six-day afternoon paper. The News competed against a morning paper with a Sunday edition, at a time when morning papers were outstripping evening papers in popularity. After the acquisition by Berkshire, the News increased competition by publishing a Sunday edition and within five years had bested its rival, the Courier-Express, which then went out of business.
Berkshire formed another insurance company, Continental Divide Insurance Company, in 1978. Through a merger with Diversified Retailing Company, Berkshire acquired two more insurers, Columbia Insurance Company and Southern Casualty Insurance Company, in 1978; Southern Casualty was later merged into National Indemnity. Even with Warren Buffett's growing reputation, not every company was eager to become part of Berkshire; CSE Corporation, the holding company for Civil Service Employees Insurance Company, turned down an informal takeover offer in 1979. Because Berkshire didn't execute hostile takeovers, the acquisition wasn't pursued.
From Large to XXL, the 1980s
In 1980 Berkshire spun off Illinois National Bank & Trust, a move required by the Bank Holding Company Act of 1969. A year later the company sold Sun Newspapers to Chicago publisher Bruce Sagan and began work on a rather unheard of practice. The next year, 1982, Berkshire instituted an unusual corporate philanthropy program that won praise from shareholders by allowing them to direct a portion of the company's charitable contributions. With this policy, Buffett said he hoped to foster an "owner mentality" among shareholders. Shareholders responded enthusiastically, with more than 95 percent of eligible shares participating in each year since the program's inception. The amount directed to charities of their choice was $2 a share in 1981 (the figure rose to $6 a share by 1989). Buffett's own favorite causes included population control and nuclear disarmament.
During the early 1980s the textile business continued to languish, and the insurance industry was hit by poor sales and price cutting. Berkshire's performance, however, was buoyed by the performance of its investment portfolio. Buying significant but noncontrolling blocks of stock in such companies as The Washington Post Company, Media General, and additional shares of GEICO Corporation, Berkshire's holdings grew in value by 21 percent in 1981--a year in which the Dow Jones Industrial Average declined by 9.2 percent--and earnings grew 23 percent per share.
In 1983 the 60 percent-owned Blue Chip Stamps merged with Berkshire Hathaway, the same year the company acquired 90 percent of the Nebraska Furniture Mart, a high-volume Omaha discount retailer and the largest U.S. home furnishings store founded by a Russian immigrant, Rose Blumkin. The Blumkin family retained management and the remaining ownership of the store, and Buffett had been known to promote it during annual shareholder meetings, often running buses to the store (a practice continued to this day). Also in 1983, another insurance company, National Indemnity Company of Florida, was formed and added to the National Indemnity group.
The mid-1980s proved a heady time for Berkshire with several monumental agreements and the sad denouement of its textiles business. Early in 1985 the company participated in Capital Cities Communications' acquisition of the American Broadcasting Company (ABC). Buffett agreed to put up $517.5 million in financing for the deal and came out with an 18 percent share of the merged company, Capital Cities/ABC. The investment community saw the move as unusual for Buffett, who tended to hunt for undervalued companies and stay away from high-priced deals. Buffett, however, said he saw the investment climate changing, with good prospects for companies like television networks which had intangible assets rather than heavy investments in plants and equipment.
Then came the end of Berkshire Hathaway's money-losing textiles operation, which the company had tried to sell. After finding no buyer, Berkshire liquidated the conglomerate's originating business due to increasing lower-cost foreign competition. Buffett lauded the efforts of Kenneth Chace--who remained a Berkshire director--and of Garry Morrison, who had succeeded him as president of textiles. Buffett had kind words for the unionized textile workers as well, who had made only reasonable demands in view of the company's financial position.
Later the same year Berkshire agreed to acquire Scott & Fetzer Company, a Cleveland, Ohio-based diversified manufacturing and marketing company, for about $320 million. Scott & Fetzer's products included World Book and Childcraft encyclopedias, and Kirby vacuum cleaners. At the same time Berkshire's insurance business underwent several changes. In a tight market for insurance, many commercial insurance buyers needed a financially stable company to underwrite large risks, so National Indemnity, Berkshire Hathaway's largest insurance company, advertised in an insurance trade publication its willingness to write property and casualty policies with a premium of $1 million or more. The advertisement produced an explosion in large-premium business for Berkshire; the company wrote $184.5 million in net premiums for large accounts from August 1985 through December 1986, compared with virtually no such business previously.
Also during 1985, Berkshire reached an agreement with Fireman's Fund Insurance Company which allowed it a 7 percent participation in Fireman's business. John J. Byrne, an executive of GEICO--an insurer partly owned by Berkshire and that shared a long history with Buffett--left to become chairman of Fireman's Fund earlier in the year, and had arranged the deal. Another insurance move during 1985 was the establishment of Wesco-Financial Insurance Company by Berkshire's Wesco Financial Corporation subsidiary.
In 1986 Berkshire finalized its Scott & Fetzer deal and went on to acquire 84 percent of Fechheimer Bros. Company, a uniform manufacturer and distributor based in Cincinnati, Ohio. The next year as the stock market continued the upward rise begun earlier in the decade, Buffett's policy of buying undervalued stocks and holding them for the long-term paid off well. In August 1987 the Wall Street Journal reported that in the five years since the market's surge began, Berkshire's stock portfolio had grown in value by 748 percent, far surpassing the Dow Jones average (which increased 233.6 percent) and Standard & Poor's (S&P) 500 stock index (which gained 215.4 percent).
When the stock market crashed in October and wiped out the year's gains, Berkshire's portfolio weathered the storm and was up 2.8 percent for the period--while the S&P 500 experienced a 2.5 percent decline. Just before the crash, Berkshire had bought $700 million-worth of preferred stock (convertible to a 12 percent common stake) in Salomon Inc., the Wall Street investment firm whose fortunes were closely tied to the market. Even after the crash, however, Buffett expressed his confidence in Salomon's management and the investment's inherent value. Another major event of 1988 was the listing of Berkshire's stock on the New York Stock Exchange (NYSE). Although the stock had previously traded in the over-the-counter market, the move was designed to reduce transaction costs for shareholders.
Berkshire Hathaway became the highest-priced stock on the exchange, at about $4,300 a share, up from $12 a share when Buffett first bought the company. The price hit a high for the decade of more than $8,000 a share but the ever-dynamic Buffett always encouraged buyers to be in the market for the long haul over frequent trading. And Buffett was not of the do-as-I-say-not-as-I-do school, for both he and Berkshire have proven themselves to be long-term shareholders in other companies, leading some to view Buffett as a protector against hostile takeovers. During 1989 the company bought significant shares of the Gillette Company, USAir Group, and Champion International Corporation, with each purchase widely interpreted as a defense against takeovers. Another major purchase was 6.3 percent or $1 billion-worth of the Coca-Cola Company (making Berkshire Coke's second-largest shareholder) and an 80 percent interest in Borsheim's, an Omaha jewelry store run by the Friedman family, relatives of the Nebraska Furniture Mart's Blumkins.
As Berkshire grew, so did Buffett's recognition and reputation as a no-nonsense businessman. To many, part of Buffett's charm was speaking his mind, even if his opinions weren't always fashionable. Buffett's frank assessment of situations brought him both fans and foes, like when he pulled the Wesco Financial-owned Mutual Savings & Loan Association of Pasadena, California, out of the U.S. League of Savings Institutions in 1989. Buffett's move was in response to the League's lobby for more leniency during the federal bailout of the S & L industry, which Buffett likened to a "mugging" of taxpayers. Another of Buffett's business stratagems, to the chagrin of many corporate honchos, was his belief that executive compensation be tied to a company's performance, not its size.
The Mega-Conglomerate with a Down-Home Feel, 1990s
In the early 1990s Berkshire continued its trend of buying complementary companies and large blocks of stock: the acquisition of H.H. Brown Shoe Company; 31.2 million shares of Guinness PLC; and 82 percent of Central States Indemnity in 1991; Lowell Shoe Company for H.H. Brown, and 14.1 percent of General Dynamics Corp. in 1992. In a related though somewhat surprising move in 1991, Buffett was appointed interim chairman of Salomon Inc. (in which the company still owned stock). After serving 10 months and effecting a turnaround, Buffett was happily back at the helm of Berkshire Hathaway full-time, although both Buffett and Munger joined the board of the ailing USAir in 1992.
The following year, H.H. Brown added Dexter Shoe to its holdings, Buffett sold 10 million shares of Capital Cities/ABC, and net earnings posted a spectacular surge from 1992's $407.3 million (down from 1991's $439.9 million) to $688.1 million. In 1994, Berkshire added major stock holdings of two companies to its portfolio (4.9 percent of Gannett Co., Inc. and 8.3 percent of PNC Bank Corp.) and Buffett admitted to two expensive gaffes: a $222.5 million faux pas from unloading 10 million Cap Cities shares for $64 each when prices topped $85, and taking a $268.5 million writedown for its questionable USAir stock (both Buffett and Munger stepped down from the airline's board after a year). Though Buffett was perhaps too optimistic with USAir and a bit pessimistic about Cap Cities, neither setback made more than a tiny ripple in Berkshire's bottom line.
During the mid-1990s Berkshire Hathaway imperceptibly changed course from a strategic long-term investment conglomerate to one still very much interested in investing but leaning more heavily towards acquiring and actually operating these investment opportunities. As early as 1993 in its annual solicitation for attractive acquisitions, Berkshire had raised the stakes by including the statement "We would be likely to make an acquisition in the $2-3 billion range." By 1995, after the company acquired Helzberg's Diamond Shops and R.C. Willey Home Furnishings through stock swaps, the stakes had risen further--up to the $3-5 billion range. Meanwhile, as Berkshire's "permanent four" (Capital Cities/ABC, Coca-Cola, GEICO, and Washington Post) lost a hint of their luster in 1995, the retailing segment more than offset this slip with Borsheim's, Kirby, Nebraska Furniture Mart, and Scott Fetzer (which posted exceptional numbers for the entire decade) exceeding expectations.
Late in 1995 Berkshire began the process of taking GEICO, the seventh largest auto insurer in the nation, private. Buffett's long history (45 years) with GEICO came full circle--after years of mentoring from Ben Graham and Lorimer Davidson, 43 years after selling his original 350 shares, and 15 years since Berkshire paid $45.7 million for a 33.3 percent stake of GEICO (which grew to 50 percent in the ensuing years)--the company spent $2.3 billion to make GEICO its own. With the GEICO deal completed in January 1996, Berkshire Hathaway's insurance segment mushroomed in both float and potential earnings, becoming more stalwart as the company's core segment. Number-wise, Berkshire finished 1995 with $29.9 billion in assets, a good-sized leap from the previous year's $21.3 billion, while Berkshire stock traded at $36,000 per share, over three-and-a-half times higher than 1992's mere $10,000 a share.
News in 1996 was the planned issuance of $100 million in new Class "B" stock (the company's original shares were now designated Class "A" stock), valued at one-thirtieth the price of its predecessor. The recapitalization was done in part, Buffett explained in the 1995 annual report, to discourage brokers from marketing unit trusts and seducing clients with the Berkshire name. Since most small investors found Berkshire's per share cost prohibitive, Buffett was attempting to make the company's stock available at a lower price without going through "expense-laden unit trusts" pretending to be Berkshire "clones." Yet what folks needed to remember, according to Buffett, was not book value, but intrinsic value. By measuring intrinsic value, an economic indicator rather than an accounting concept, investors had a better handle on worth and whether or not something was a good long-term risk. In these terms, Buffett hoped to double Berkshire's per-share intrinsic value (of Class A stock) every five years, which was still a rather daunting task. Yet if anyone could do it, it was Warren Buffett, Charlie Munger, and Berkshire Hathaway.
As no one foretold the riches Berkshire had gained in just the last 10 years, few would hazard a guess of where the company would be by the year 2000. In this case, however, saying the sky was the limit would not be portentous. As for Chairman Buffett's future, when asked by a Harvard Business School student when he planned to retire, Buffett quipped "About five to ten years after I die." Such was the singular spirit and humor of the man--perhaps the world's most celebrated and successful businessman and investor--running Berkshire Hathaway.
Principal Subsidiaries: BHR; Berskhire Hathaway Credit Corporation; Berkshire Hathaway Life Insurance Co.; Blue Chip Stamps; Borsheim's; H.H. Brown Shoe Co.; Buffalo News; Campbell Haufeld; Carefree; Dexter Shoe Companies; Fechheimer Bros. Co.; France; Halex; Helzberg's Diamond Shops; K & W Products; Meriem; Mrs. B's Clearance and Factory Outlet Warehouse; Nebraska Furniture Mart; Northland; Powerwinch; Precision Steel Products; Quikut; ScottCare; Scott Fetzer Company; Scott Fetzer Financial Group; Scot Labs; Stahl; See's Candies; Wayne; Wesco Financial; Western Enterprises; Western Plastics; R.C. Willey Home Furnishings; and World Book; Columbia Insurance Co.; Continental Divide Insurance Co.; Cornhusker Casualty Co.; Cypress Insurance Co.; Kansas Fire & Casualty Co.; National Indemnity Co.; National Indemnity Co. of Florida; National Indemnity Co. of Minnesota; National Fire & Marine Insurance Co.; National Liability & Fire Insurance Co.; Redwood Fire & Casualty Co.; Wesco Financial Corp.
Further Reading:
Collins, Linda, J., "Berkshire's Buffett Sees More Competition Ahead," Business Insurance, May 7, 1990, p. 67.
Grant, Linda, "The $4 Billion Regular Guy," Los Angeles Times, April 7, 1991, p. 36.
Hagstrom, Robert G., Jr., The Warren Buffett Way: Investment Strategies of the World's Greatest Investor, New York: John Wiley & Sons, 1994.
Kilpatrick, Andrew, Warren Buffett: The Good Guy of Wall Street, New York: Donald I. Fine, 1992.
Kilpatrick, Andy, Of Permanent Value: The Story of Warren Buffett, Birmingham, Alabama: Andy Kilpatrick Publishing Empire, 1994.
Laing, Jonathan R., "The Collector: Investor Who Piled Up $100 Million in the '60s Piles Up Firms Today," The Wall Street Journal, March 31, 1977.
Loomis, Carol J., "The Inside Story of Warren Buffett," Fortune, April 11, 1988.
Lowenstein, Roger, Warren Buffett: The Making of an American Capitalist, New York: Random House, 1995.
Sosnoff, Martin, "Larry the Tortoise, Warren the Hare," Forbes, January 27, 1997.
Source: International Directory of Company Histories, Vol. 18. St. James Press, 1997.
