Mitt Romney and Warren Buffett are rich.
Mitt Romney, with a net worth of $300 million or so, is really rich. Warren Buffett, with $30 billion, is unimaginably wealthy.
How did they get there?
They bought undervalued companies, but that’s where the similarities end.
In 1972, Buffett bought See’s Candy. Buffett believed that the family-owned, boxed-chocolate company had high-quality products and good prospects for the future.
He was right. According to Buffett’s own appraisal, See’s has been a “dream business.” Here’s why, from the Sage of Omaha’s 2007 letter to investors:
“We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million … consequently, the company was earning 60 percent pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.
“Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth — and somewhat immodest financial growth — of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire. After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to 6 billion humans, See’s has given birth to multiple new streams of cash for us (The biblical command to ‘be fruitful and multiply’ is one we take seriously at Berkshire.)”
As an investor, Buffett believes in symbiosis. He’s in it for the duration. He doesn’t burden the companies he acquires with layers of debt, he doesn’t demand they pay tribute to a vast corporate hierarchy, and he lets managers manage.
He nurtures companies; he doesn’t tear them apart. He’s a partner and a protector. Think of him as a stallion protecting his mares, an old bull protecting the herd.
That’s why he takes the long view. Without Buffett’s careful, benevolent oversight, See’s might have over-expanded and collapsed, or compromised quality for short-term profit. Instead, it’s the market leader, accounting for more than half the profits in its market niche. It employs 2,000 people in 200 locations.
For much of his business career, Mitt Romney was not a partner but a predator. As the founder of Bain Capital, he sought out companies that were weak, defenseless and ignored — companies that could be loaded with debt, dismantled and discarded. It was a profitable strategy.
It was that of the ship-breaker, or the scrap-metal dealer. You don’t build, you tear down. Like the local scrappers who pilfered historic bronze plaques, you don’t care where it comes from if you can get good money for it.
Hedge funds, private equity sharks and ad hoc partnerships, their pockets stuffed with money raised from return-hungry pension funds and other institutions, went after companies large and small. If they were in play for any reason — restive controlling shareholders who wanted to cash out, declining stock price, undervalued assets that could be sold off — they were shark bait.
Consider Freedom Communications, parent of The Gazette in Colorado Springs.
Until 2002, Freedom was owned and controlled by the descendants of company founder Raymond Hoiles. Infighting among family members, some of whom wanted to sell, resulted in a heavily leveraged recapitalization structured by two private equity firms. Staggering under hundreds of millions in new debt, and hammered by both the recession and the secular decline of the daily-newspaper industry, Freedom filed for bankruptcy in 2009.
The sharks walked away, leaving the banks that had financed the deal to gnaw on the company’s bones. A new set of sharks stepped in, sold off the pieces, and made a few bucks — hyenas feeding on the leavings of other hyenas.
The Gazette’s new owner plans to get rid of it by summer’s end. The house that Raymond Hoiles built is no more, and a once-great newspaper is sadly diminished.
There’s still hope, though — maybe Warren Buffett will buy it!
A few boxes of candy would do the trick.