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The Fechheimer case study in the chronicles of investing is unusual because Buffett and Munger chose to buy a controlling stake from private equity sellers who had acquired their shares in a leveraged buyout five years before. These smart cookies cashed-out making a good profit. While there are often good reasons for private equity players to sell – such as raising finance in invest in other high risk/high return ventures, or to fulfill obligations to return capital to investors – anyone buying from them always needs to ask (a) why they are willing to part with what they are bound to hawk as a brilliant company? and (b) have they made the numbers look pretty over the two years prior to the sale by, say, holding back on essential R&D, marketing, management training, etc., and by annoying customers – but not too much just yet – with unjustified price rises, thereby damaging the economic franchise?
To counter these worries Buffett and Munger sought and found reassurance that the business remained strong and that the price being asked was not excessive relative to its earnings power. This reassurance came, yes, from the accounting numbers, but more significantly from the character and commitment of the Heldman family who had run the firm since 1941.
They possessed the qualities Buffett looked for, i.e. “talented, high-grade, and love what they do” (Buffett’s 1986 letter). And they still held the remaining 16% of the shares, so director and shareholder alignment of interests was assured.
Advertising works
By 1982 there were thousands of readers of Buffett’s annual letters and many of Berkshire Hathaway’s shareholders were wealthy business men and women, who collectively had a terrific knowledge of businesses across America. Buffett figured that these people might be willing to act as his eyes and ears when it came to finding new businesses worth buying. So, from 1982 he placed the following advertisement (or something similar) in his letters:
“This annual report is read by a varied audience, and it is possible that some members of that audience may be helpful to us
in our acquisition program. We prefer:
(1) large purchases (at least $5 million of after-tax earnings),
(2) demonstrated consistent earning power (future projections are of little interest to us, nor are
“turn-around” situations),
(3) businesses earning good returns on equity while employing little or no debt,
(4) management in place (we can’t
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