Buffett

by Roger Lowenstein

  Buffett, who had met Murphy in the early seventies, knew that anyone who didn’t waste paint on his headquarters was his sort of guy. He bought 3 percent of Cap Cities for Berkshire in 1977, but after a run-up in the stock he sold—a decision Buffett would later attribute to “temporary insanity.” Meanwhile, Murphy and Burke began to check with Buffett before each big move. One time, when Walter Annenberg was mulling the sale of his publishing empire, which included such gems as TV Guide and the Daily Racing Form, Buffett said, “Murph, how about the two of our companies buying it on a fifty-fifty basis?”3 They went to see Annenberg in Beverly Hills and offered $1 billion. Annenberg turned them down, and Buffett and his “pal” went to a Swensen’s—just a couple of regular guys with a billion bucks to burn—and drowned their sorrows over milk shakes. But Buffett’s dream of becoming Murphy’s partner didn’t die. He often declared that the Murphy-Burke ensemble was the best in corporate America.

  Buffett also had shown more than a passing interest in ABC. In the late sixties, ABC had agreed to be bought by International Telephone & Telegraph, but the Justice Department had blocked it. Buffett had been at the Pacific Stock Exchange when the deal had fallen through. He turned to Ed Anderson, Munger’s associate, and said, “You know, Ed, ABC is totally in the hands of arbitrageurs. Anyone could get control. I sure wish I had the money.” He bought a slice of ABC in 1979, and again in 1984. When Buffett took Murphy’s call, Berkshire already owned about 2.5 percent of ABC’s stock.

  Murphy was equally keen on ABC, which had lucrative local stations and the prized jewel of a national network. Late in 1984, it became apparent that the Federal Communications Commission was going to raise the ceiling on television station ownership by a single company, making a merger possible. Soon after, Murphy dropped in on Leonard H. Goldenson, the seventy-nine-year-old architect and chief executive of ABC, at the ABC building in New York. “Leonard,” he began, “I don’t want you to throw me out of the thirty-ninth floor, but I have an idea.”4 Goldenson did not throw him out. ABC, he knew, was being stalked by raiders who, if successful, were likely to dismantle the company that had been his life’s work. If he had to sell, better to someone like Murphy, who would keep the company intact.5

  Two days later, Buffett met Murphy and Burke in New York.

  Buffett began with a word of caution. “Think about how it will change your life,” he warned. Murphy and Burke instantly understood. Cap Cities, which owned such properties as Women’s Wear Daily and the Kansas City Star, was little known outside its industry, and Murphy and Burke led private lives. Now, Murphy, a devout Catholic who liked to stop at St. Patrick’s Cathedral on his way to work, would be thrust in the company of network executives who rode to work in limousines.

  Murphy was impressed that Buffett’s first thought had been “the personal equation.”6 But Murphy wanted to go ahead.

  Buffett had another concern, which neither Murphy nor Burke had anticipated. If Cap Cities bought ABC, then, by the perverse jungle code on Wall Street, Cap Cities would itself be in play.

  “What do we do about that, pal?” Murphy asked.7

  Buffett said, “You better have a nine-hundred-pound gorilla. Somebody who owns a significant amount of shares who will not sell regardless of price.” Obviously, that somebody would have to be very rich, and totally loyal.

  “How about you being the gorilla, pal?”

  In a later account, Buffett said he had not, until that moment, envisioned a role for himself.8 But what other gorilla could he have had in mind? Indeed, Burke’s impression was that he had thought it all through. No sooner did Murphy pop the question than Buffett raised two obstacles to his going in.

  Cap Cities owned a television station in Buffalo. If Berkshire became its “gorilla,” then, because of FCC rules, either the station or the Buffalo News would have to go. Buffett said he couldn’t sell the News. “I’ve got my life invested in that thing,” he noted. Murphy agreed to sell the station.

  The second issue was stickier. Again, under FCC rules, Buffett could not be on the boards of both the Washington Post and Cap Cities. He had strong feelings about the Post, and also about the Graham family. He wanted to mull it over.

  They parted, and Buffett flew back to Omaha. Thinking it through, he decided that if he left the Post board but kept his stock, his relationship with the Post could continue.*

  That night, he called Murphy. Having worked out the numbers in advance, Buffett immediately proposed that Berkshire buy three million shares of Cap Cities at $172.50 a share.9 That was the current market price (up from the original seventy-two cents).† Murphy instantly agreed. Buffett now had a deal to buy 18 percent of Cap Cities for half a billion dollars—eight times as big as his most recent deal, with Mrs. B, and fifty times the size of his first big media investment, in the Washington Post. Cap Cities, in turn, would use Berkshire’s infusion of equity to finance its planned purchase of ABC.

  But the talks with ABC hit a snag. Bruce Wasserstein, cochief of mergers at First Boston, was representing the network. The plump, disheveled banker could be prone to goading clients into overpaying, but when working for a seller he was brilliant. Cap Cities’ first offer was $110 a share, but under Wasserstein’s prodding, Murphy, Burke, and Buffett grudgingly went to $118—twice as much as ABC’s recent market price. Still, Wasserstein demanded more. On March 12, Murphy trudged over to the black Third Avenue skyscraper of Skadden Arps Slate Meagher & Flom to tell Joseph Flom, ABC’s attorney, that Cap Cities was pulling out. But Flom wouldn’t let Murphy leave. He insisted that the deal could be saved.10

  That afternoon, both sides reconvened at Skadden. The group was an eighties set piece, starting with Flom, a pioneer in the tiny hostile raids of the 1950s. Now, no takeover was complete without him. His friend and perennial rival in the merger wars, defense specialist Martin Lipton, was working for Cap Cities. Wasserstein, the nec plus ultra of deal-makers, led a team of bankers for ABC. (Cap Cities, in accordance with Buffett’s and Munger’s prejudice, did not use an investment bank.) Filling out the powwow were principals from ABC and Cap Cities.

  But the real talking was handled by two: Buffett and Wasserstein. Michael Mallardi, the chief financial officer of ABC, was struck by the contrast: the disarming, informal Midwesterner, and the bright, intense, Brooklyn-born banker—younger, but not at all intimidated. Wasserstein noticed that Buffett dispensed with the histrionics customary to negotiations and lightened things up with jokes. He enjoyed doing battle with him. But they were $100 million apart. Now the banker’s tone got a little tense. He insisted that, in addition to cash, ABC’s stockholders should get warrants to buy Cap Cities stock. In other words, Wasserstein wanted them to have the option of keeping a piece of the company they were selling. “Our view was, if Buffett was such a clever fellow—if he’s buying why are we selling?” Wasserstein recalled. “We wanted a kicker.”

  Buffett was dead-set opposed. He gave a little speech, saying that he hated to issue stock, a practice that he had criticized in his annual reports and, indeed, that had been verboten at Berkshire. Then Wasserstein gave a speech, arguing that ABC’s shareholders deserved a piece of the upside. Then he led the ABC group outside. The talks were at an impasse.

  When the ABC team returned, Buffett blinked. “I know I’ll regret doing this,” he began—and declared that Wasserstein could have the warrants. The ABC people were stunned. Now each side had to figure out what the warrants were worth. Wasserstein’s computer mavens began to crunch a series of numbers. Buffett, handling the calculations for Cap Cities, simply did them in his head.11

  Buffett had saved an investment banking fee, but Wasserstein had gotten the better of him. Unlike Munger, who affected a vague lack of interest, Buffett may have wanted ABC—of which he would now be the biggest individual owner—a bit too much. As Buffett predicted, he would come to regret the warrants.‡

  Also, Buffett’s price for Cap Cities—sixteen times earnings—was steep for a Graham disciple. As he admitted
to Business Week, “Ben is not up there applauding me on this one.”12 Buffett was betting that Murphy and Burke would be able to trim the fat from ABC’s stations and boost their profits. And in truth, Buffett was running out of opportunities. Stock prices were rising, and, as Berkshire grew, Buffett needed to make big investments; small ones had become irrelevant. Outside the oil patch, the $3.5 billion ABC deal was the biggest merger ever.

  This record was not on the books for long. A raft of deals followed, many of them hostile. Investment banks, breaking a time-honored code, went after former clients. Corporate minnows gobbled up whales. Wall Street had become a war zone.

  The raiders obtained a certain celebrity. They styled themselves as champions of the little guy, or, at least, the little shareholder. The week of Buffett’s big deal, T. Boone Pickens appeared on the cover of Time, declaring himself an enemy of “entrenched” corporate executives.13 A paper entrepreneur such as Pickens did not actually acquire, much less reform, any of his targets. He merely bought enough of their stock to drive them into the arms of other suitors—at an immense profit to himself.

  But the tactics of target CEOs were no less self-serving. Many of them forked over greenmail, a bribe (paid from the pockets of their shareholders) to induce the raiders to go away and leave the CEOs their jobs. Even big companies, such as Walt Disney (greenmailed by Saul Steinberg), were cowed into paying up. Others, such as Phillips Petroleum, bedeviled by Carl Icahn, were so intent on making themselves unattractive to the bad guys that they went deeply into debt, wrecking their own balance sheets before the raiders could do it to them.

  This strange game presented an opening for Buffett. He was hearing from quite a few CEOs that they were under siege.14 It occurred to Buffett that Berkshire could make an attractive baby-sitter. It had a reputation as an unmeddlesome, and stable, owner. And, not needing financing, it could move fast. For a desperate CEO, selling to Buffett could be a third route between succumbing to a raider and resorting to self-immolation via greenmail. With this in mind, Buffett, in his letters, regularly touted Berkshire as a safe harbor: “For the right business—and the right people—we can provide a good home.”

  In the fall of 1985, Buffett got his chance. Scott & Fetzer was an obscure but not small Ohio-based conglomerate, with units ranging from World Book Encyclopedia to Kirby vacuum cleaners. Wall Street had ignored it until 1984, when Ralph Schey, the chairman, tried to buy it in a $50-a-share leveraged buyout. His offer was cheap (only $5 above the market price), and speculators, sensing that it would be topped, bid the stock to 53. Within a fortnight, a bid, at $60, did appear—from Ivan Boesky, the arbitrageur. Boesky, an obsessive and haughty trader, had become super-rich on the strength of his connections to Drexel. It was not yet known, of course, that Boesky was trading on illegal stock tips (for which he would go to prison), merely that he epitomized Wall Street’s fast-money culture. Schey, a nuts-and-bolts type, was repelled at the thought of working for Boesky, and put off by Boesky’s insistence that a deal include a $4 million “break-up fee” for Boesky.15 Schey turned him down—but now he had a problem. Boesky, who owned 7 percent of the stock, would sell to the next bidder.

  Schey cobbled together a new LBO, at $62, but the plan collapsed. What was worse, his wheeling and dealing had driven the stock into the hands of the “arbs,” the short-term speculators (like Boesky) whose first, last, and only interest was to sell the company. Now Schey had to find a buyer before the arbs did. In the summer of 1985, Schey, to his horror, learned that Steven Rales, a thirty-four-year-old financier, and Mitchell, his twenty-nine-year-old brother, controlled 6 percent of the company. The Rales were emblematic of a new breed of postpubescent raiders. With little equity (but plenty of debt), they had taken over a chain of small companies, and now, convinced of the limitless power of leverage, they were batting their eyes at the prospect of Scott Fetzer. Ralph Schey, meet the 1980s.

  Buffett had also coveted Scott Fetzer—and had also bought a chunk of the stock. The company had a high cash return, and World Book was the sort of publishing franchise that Buffett craved. (It didn’t hurt that he had read it as a boy.) And having followed Schey’s travail in the newspaper, Buffett sensed an opening. In October, he dispatched a brief letter: “We own 250,000 shares. We have always liked your company. We don’t do unfriendly deals. If you want to pursue a merger call me.”16

  For Schey, this was manna from heaven. He agreed to meet Buffett and Munger in Chicago, where they discussed a deal over dinner. The next morning, October 23, Buffett made a cash offer of $60 a share. Schey had two demands: no “material adverse changes clause” (a contractual loophole that allows the faint-of-heart to back out at the altar) and no “break-up fee.” Normally, such demands would have been relayed to the investment bankers, but Buffett didn’t have an investment banker. He simply shrugged and suggested that Schey write up a contract. A week later, for a total price of $315 million, Buffett had a very rich new prize.

  Buffett’s cash came from yet another deal, also in October: Philip Morris’s shotgun (and unfriendly) takeover of General Foods. Berkshire, the food company’s biggest holder, gleaned a $332 million profit. “I’m not unhappy,” Buffett chortled.17 His stock hit a new high, $2,600 a share. That same month, Buffett made the Forbes list of billionaires, trailing, among others, Sam Walton, Ross Perot, and Harry Helmsley.

  Takeovers, obviously, had made Buffett a good deal richer. But despite his handsome profits, he was atypical of the deal age. When compared to Ronald O. Perelman, who epitomized the takeover artists, Buffett was closer to its inverted image.

  Both men were highly acquisitive and were shrewd judges of companies, and they shared more traits as investors than one might suppose. Perelman eschewed high-tech and looked for strong cash flow. Like Buffett, he took a long-term view and was, at heart, a financial person, not a manager. He once told Forbes that he carefully read ten annual reports a week.18

  On the other hand, the blustery Perelman did unfriendly deals; Buffett did not. Perelman was attracted to leverage; Buffett shunned it. Finally, Buffett participated in deals only as a shareholder in a public company, and his take was proportional to that of other shareholders. This was not true of the vast majority of deal-makers, who profited in ways (such as fees) that were available only to insiders.

  Perelman, in particular, had frozen out shareholders of Technicolor and MacAndrews and Forbes—the two companies that made him rich—allegedly at grossly unfair prices, and was besieged by lawsuits following each. Buffett had agreed to testify as an expert witness against Perelman, on behalf of one claimant, his friend Bill Ruane, who had owned MacAndrews and Forbes stock. In the words of a lawyer involved in related litigation, Buffett was expected to say that Perelman “screwed the shareholders.”19 Perelman vigorously denied that he had done so. But the case was settled, averting what might have been an interesting face-off.20

  Simultaneous to Buffett’s takeover of Scott Fetzer, Perelman demonstrated the new rule of Wall Street—that once in play, a company, as an independent entity, was doomed. As Connie Bruck observed in The Predators’ Ball, Perelman’s assault on Revlon had elements of class war. Michel Bergerac, the cosmetic company’s aristocratic chairman, regarded the cigar-puffing Perelman and his Drexel financiers as “pawnbrokers.” He curtly waved them off, saying the company was not for sale. Perelman sneered back, depicting the lackluster Bergerac, who kept a butler and a suite in Paris (his “castle,” Perelman called it), as an archetype of corporate waste. In a normal time, the raid would have been sheer fancy. Pantry Pride, Perelman’s vehicle in the fight, had a net worth of only $145 million, while Revlon was worth over $1 billion. But Perelman, financed with junk bonds, prevailed. Revlon was his, and Bergerac was out of a job. He had been wrong in saying that Revlon was not for sale. Everything was for sale.

  In November 1985, a week after Perelman claimed his prize (he decided, actually, to keep the butler and the castle),21 Buffett appeared at a seminar on hostile takeovers at Columb
ia Law School. The panel and audience included CEOs, bankers, mergers and acquisitions lawyers—among them Marty Lipton, licking his wounds from his unsuccessful defense of Revlon—and a coterie of academics.22 Takeovers were in their salad days. The Cap Cities/ABC deal was only eight months old—the merger had not even closed—and five larger deals had already surpassed it. The day before, Henry Kravis had stood before the Beatrice board and offered $6.2 billion to take the company private. A Beatrice director, sensing the inevitable, burst into tears in the boardroom.23 Money was flying around the Street so fast (Revlon spawned $120 million in lawyers’ and bankers’ fees) it was a wonder that anyone had come uptown, much less to have dinner on an ivy-covered campus. But they wanted to see Buffett.

  No doubt the audience was thinking of Revlon, but Buffett did not refer to it. Appearing without notes, he spoke, instead, about See’s Candy, and about himself. He had been investing for more than forty years, since he had purchased three shares of Cities Service at age eleven. In that yellowed, far-off memory, he recalled, the stockholder’s position “as unquestioned boss” had seemed very simple to him.