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As Salomon grew in strength in the mid-1990s Berkshire spent $324m on its common stock. That 6.6m shareholding, together with the rights attached to its preferred stock, gave Warren Buffett effective control of 20% of the voting rights. This was reduced to 18% by the redemption of one-fifth of the preferred in 1995 – Berkshire received a cheque for $140m. Then, in October 1996, one-fifth of the preferred stock was converted into 3.7m common stock.
Selling
Travelers Group, an insurance and brokerage firm, was looking to grow through acquisition and in 1997 offered to buy Salomon, creating one of only a handful of giant financial companies in the USA, Europe and Japan. Berkshire received Travelers Group common and preferred stock to the value of approximately $1.8bn.
Berkshire’s return
Thus, over a ten-year period Berkshire put $700m into Salomon’s preferred and $324m into common stock, and received back $592m in preferred dividends, a $140m redemption payment and $1.8bn in Travellers shares plus a few million in common stock dividends.
A total of $1,024m went in and slightly over $2,532m came back, which works out at an annual return of 14.5% (allowing for timing of cash in and out), not far short of Buffett’s original target.
“Looking back, I think of my Salomon experience as having been both fascinating and instructional, though for a time in 1991-92 I felt like the drama critic who wrote: “I would have enjoyed the play except that I had an unfortunate seat. It faced the stage.” (1997 Letter)
Ongoing emphasis on decency
I’ll round off this morality tale of lost and re-discovered ethics with Buffett’s reminder to all his managers of the attitude he expects them to adopt, as set out in his letter to his “All-Stars”:
“Memo To: Berkshire Hathaway Managers (“The All-Stars”) cc: Berkshire Directors From: Warren E. Buffett Date: July 26, 2010
“This is my biennial letter to reemphasize Berkshire’s top priority and to get your help on succession planning (yours, not mine!). The priority is that all of us continue to zealously guard Berkshire’s reputation. We can’t be perfect but we can try to be. As I’ve said in these memos for more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.”
“We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter. Sometimes your associates will say “Everybody else is doing it.” This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they can’t come up with a
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