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The quality of the senior managers is crucial to a firm’s success. Sometimes faith in just one person can be the most important factor in making an investment decision, as Buffett and Munger explained at Berkshire Hathaway’s May 2016 AGM.
Question from a BH shareholder: “Precision Castparts, besides confidence in CEO Mark Donegan, what do you like about their business that made you pay an extraordinarily high multiple?
Warren Buffett: – We completed the acquisition of Precision Castparts at the end of January this year. We made the deal last August. You covered the most important asset in your question, Mark Donegan, who runs Precision Castparts is an extraordinary manager.
We’ve seen a lot of managers over the years. I would almost rank Mark as one of a kind. He is doing extremely important work in primarily making aircraft parts.
I would say there are certainly no disadvantages to him to be working for the company, being a subsidiary of Berkshire, and not being a public company. I think he would say over time there could be some significant advantages.
For one thing, he can spend 100% of his time now on figuring out better things to do with aircraft engines. It was always his first love to be thinking about that, and he did spend some time thinking about that, but he also had to explain quarterly earnings to analysts and perhaps negotiating bank lines.
His time can be spent exactly on what makes the most sense to him. Mark doesn’t have to come ever to Omaha to put on some show for me in terms of justifying a billion dollar acquisition. He doesn’t have to waste his time on anything that isn’t productive.
Running a public company, you do waste your time on quite a bit of stuff that isn’t productive.
We’ve taken the main asset of Precision Castparts and made him in this case even more valuable to the company.
Precision Castparts has always made a number of acquisitions, but being part of Berkshire, there’s really no limitation on what can be done. His canvas has been broadened with the acquisition by Berkshire. I see no downside whatsoever. I have an 800 number if he needs capital.
He wasn’t paying much of a dividend before, but he doesn’t have to pay any dividend now. Precision Castparts will do better under Berkshire than it would have independently although it would have done very, very well independently.
Charlie Munger: – In the early days, we used to make wise-ass remarks. Warren used to say we buy a business that an idiot can manage, because sooner or later an idiot will. We……………………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
