Filed under: Deals, Berkshire Hathaway (BRK.A)
To borrow a phrase my high school Latin instructor (whom I completely loathed) used to toss around, “Even Homer nods.” That stated, it’s rare that an executive will write openly and with a touch of humor about the worst acquisition of his career. Then again, Warren Buffett is a rare executive.
In his latest letter to shareholders (PDF file — may take a while to load) of Berkshire Hathaway (NYSE: BRK.A), Buffet wrote about his 1993 purchase of the Dexter Shoe Co.
Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I purchased in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business — one now valued at $220 billion — to purchase a worthless business. To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future — you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an hideous woman, but I’ve sure woke up with a few.”
Coming from one of a handful of companies — compared to the number that have tried — to have built a strong business through acquisitions, Warren Buffett’s thoughts on acquisitions are priceless.
His comments that he compounded the mistake by financing it with shares of his stock — now worth $3 billion — presents an often-overlooked side to acquisitions.
When a company announces a stock-funded acquisition with great fanfare, I get worried. Doesn’t that mean that the company’s management think the target company is a superior investment than their own company? If it isn’t, why trade a stake in their company for it?
Oh, I know — synergy and strategic acquisitions. Hah!
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