By Dayanand Menashi [email protected] Safe Multiple – learn more from Buffett- The Making of an American Capitalist – By Roger Lowenstein
Chapter 1 Pre 1965 Era
In the dawn of 20th century New Bedford, CT was a bustling Textiles town. It had around seventy cotton spinning mills. Hathaway Manufacturing Corporation was one of them. It was founded in 1888 by Horoto Hathaway. New England’s success in Textile industry was short lived. It could not compete with the cheap labor of South. At its peak, New England Textile industry employed 30,000 people. But by 1940 the number had dwindled to below 10,000.
As the textile industry declined, its investors ran for safety and consequently diversified into other sectors. But Hathway corp was one bright star that still had the courage to face the headwinds. It was headed by an industry visionary named Seabury Stanton.
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Stanton was the chip of the old block. He had learnt the ropes of the industry from his father Young Seabury. Other than his Harvard credentials, he possessed strong military experience that had molded him to be a disciplined leader who was not afraid of venturing unchartered waters. His vision was to make Berkshire a state of the art Textile company. Stanton was bold to pour huge amounts of capital in modernizing its mills. The company also pioneered the research of synthetics and reaped its benefit during World-War-II. But as the war ended, the cost competence of Southern states forced the Textile companies of Northern states to mover their operations to southern states.
Hathaway’s only chance of survival was to look for a partner who could complement its strengths. Its best bet was Berkshire Fine spinning associates inc. Oliver Chace founded the company in 1806. His descendants continued the family business and by 1950 Malcolm Chace was heading the company. Even though the business had survived for one and a half century, but it faced intense pressure from the southern mills. It did not have a large capital outlay and conserved most of its cash. Berkshire was high tech with large capital outlay, Hathaway operated with minimal capital outlay and conserved most of its cash. They thus complimented each other. In order to maximize each other’s strengths they decided to merge in 1955 , thus paving the way for creation of Berkshire Hathaway inc.
Malcolm Chace became the Chairman of the company and Stanton became its President. Stanton empowered the new company with his vision of modern technology. But he was short on financial insight. He did not have a clear plan of when the huge investments would pay-off. The decreasing price of Textiles made his job still tough. In 1962 the company incurred a loss of $2.2mn.
Seabury was trying to project his son Jack as the next leader of the company, but he was not looking eye to eye with his brother Otis who controlled the commercial department of the company. Seabury also had some differences of opinion with Malcolm Chace. All this was taking a big toll on the company. Wall street had axed its stock from around $14 ¾ in 1955 to 8 ¾ in 1963.
How Buffett first got involved with Berkshire Hathaway? When Buffett was working for Graham Newman, Berkshire’s stock made it to the firm’s watch list. But eventually the firm passed it. Buffett kept following the stock and in 1962 bought it thru Buffett partnership when its stock was $8/share. Other than the company’s capital of $16.5 / share, it had able managers like Seabury and with its impeccable R&D had an edge over its competitors. Buffett was keen in knowing more about the company’s top management. He first met Jack (Seabury’s son) who was helpful in giving Buffett a detailed financial history of the company. But he didn’t have time to give Buffett a tour of the company. He instead passed on this privilege to Ken Chace a senior executive of the company. Ken spent two days giving Buffett the first-hand knowledge of the company’s operations. Buffett was deeply impressed with Ken’s detailed insight of the business and his dedication towards the company.
In the meantime Seabury was sensing the unrest that was building around him. The only way he could overcome that was by having absolute control over the company. He started approaching major shareholders of the company to buy back the stock. Buffett was also approached. The deal was called off at last moment because their offers were separated by 3/8th of point.
Buffett and Seabury’s differences continued. This prompted Buffett to engineer a change in management and appoint his own man at the top. In order for a management shakeup Buffett needed to pick up more blocks of shares. He first approached Malcolm Chace. But Chace’s family sentiments were very much attached with Berkshire, so he refused to sell his shares. Buffett then through his broker Stanley Rubin met Otis at Wamsutta club over lunch. Through his charismatic appeal, Buffett won over Otis . This was enough for Buffett to influence the board of directors.
On May-10, 1965 the board met. Seabury and his son Jack made a final attempt to win over the board of directors, but at the end had to bite the dust and resign. As per Buffett’s recommendation Ken Chace was made the president and Buffett became the Chairman of Executive committee. Malcolm Chace continued as Chairman of the board. Berkshire’s stock closed at $18 that day.