A little less than a month ago, Warren Buffett’s Berkshire Hathaway and Heinz (controlled by Brazilian investment firm 3G) jointly announced a takeover offer for Kraft. The Associated Press quoted Mr. Buffett as asserting “This is my kind of transaction.” I looked for the press release containing the quote on the Berkshire website before starting to write this, but found nothing. The News Releases link on the home page was last updated two weeks before the Kraft announcement. Given the kindergarten look of the website, I’m not so surprised …and I’m willing to believe the quote is genuine. If not, there goes the intro to my post.
As to the “my kind” idea, it is and it isn’t.
On the one hand, Buffett has routinely been willing to be a lender to what he considers high-quality franchises, notably financial companies, in need of large amounts of money quickly–often during times of financial and economic turmoil. The price of a Berkshire Hathaway loan typically includes at least a contingent equity component. The Kraft case, a large-size private equity deal, is a simple extension of this past activity.
On the other, this is not the kind of equity transaction that made Mr. Buffett’s reputation–that is, buying a large position in a temporarily underperforming firm with a strong brand name and distribution network, perhaps making a few tweaks to corporate management, but basically leaving the company alone and waiting for the ship to right itself. In the case of 3G’s latest packaged goods success, Heinz, profitability did skyrocket–but only after a liberal dose of financial leverage and the slash-and-burn laying off of a quarter of the workforce! This is certainly not vintage Buffett.
Why should the tiger be changing its stripes?
Two reasons:
—the opportunity.
I think many mature companies are wildly overstaffed, even today.
Their architects patterned their creation on the hierarchical structure they learned in the armed forces during the World War II era. A basic principle was that a manager could effectively control at most seven subordinates, necessitating cascading levels of middle managers between the CEO and ordinary workers. A corollary was that you could gauge a person’s importance by the number of people who, directly or indirectly, reported to him.
Sounds crazy, but at the time this design was being implemented, there was no internet, no cellphones, no personal computers, no fax machines, no copiers. The ballpoint pen had still not been perfected. Yes, there were electric lights and paper clips. So personal contact was the key transmission mechanism for corporate communication.
Old habits die hard. It’s difficult to conceive of making radical changes if you’ve been brought up in a certain system–especially if the company in question is steadily profitable. And, of course, the manager who decided to cut headcount risked a loss of status.
Hence, 3G’s success.
—plan A isn’t working
One of the first, and most important, marketing lessons I have learned is that you don’t introduce strawberry as a flavor until sales of vanilla have stopped growing. Why complicate your life?
Buffett’s direct equity participation in Kraft is a substantial departure from the type of investing that made him famous. I’ve been arguing for some time that traditional value investing no longer works in the internet era. That’s because the internet has quickly broken down traditional barriers to entry in very many industries. It seems to me that Buffet’s move shows he thinks so too.