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This newsletter is instructive in two ways (a) the priorities in business deal-making (b) looking for the qualitative factors making a business attractive even when short term profits are non-existent.


Why sell?

Goldman Sachs in 1998 wanted to realise a return on its 25% stake, or at least obtain a market value and trading for its shares, and so pressed Santulli, CEO and majority shareholder, to float the business on a stock market. Santulli was hesitant because he believed stock market investors would run scared of the volatility and poor profits while NetJets was in its fast-growth phase.

If he could sell it to investors at all, the price was likely to be low, he thought. “I could never take this company public. Shareholders wouldn’t be able to stomach the ups and downs of this business” he explained to journalist Stephen Pope (From a 1996 interview with Stephen Pope (2009) “Santulli’s Departure from NetJets”, Business Jet News October. )

And Santulli did not want “a 28-year-old analyst” telling him how to run his business.

But maybe there was someone he knew who recognised the strength of its market position and its potential, and would be willing to pay a decent price while leaving him to grow the business?

Selling Buffett a fraction

In 1995 Frank Rooney at H. H. Brown (a Buffett investment described in Newsletters dated 12th – 19th August 2020)) had been extolling the virtues of his NetJets membership and suggested to Buffett that he meet Richard Santulli to investigate signing up.

Buffett says, “It took Rich about 15 minutes to sell me a quarter (200 hours annually) of a Hawker 1000.” (Buffett’s 1998 Letter).  Warren and his wife Susan went to look at a plane at Teterboro, New Jersey “and Rich was there in a Hawker 1000, and my wife fell in love on the spot,” Buffett recalled in an interview with Warren Berger, who then cheekily asked: “with Santulli or the plane?” Buffett laughed. “Believe me, I don’t ever want to give her a choice between me and Rich. She would probably leave me in a minute.” (Quoted in Warren Berger (2001) “Hey, You’re Worth It (even now)” Wired June 1)

In the following three years the Buffett family flew 900 hours on 300 trips. They loved the service, finding it friendly, efficient and safe. Buffett liked it so much that he enthusiastically took part in a testimonial advertisement long before he knew there was a possibility of buying the company. But he did say to Santulli that if he ever did want to sell then please give him a call.

A short discussion and then a deal

That call came in May 1998 by which time revenues were close to $1bn, up from $100m in 1995. Santulli wanted Buffett’s advice on him caving-in to Goldman Sachs’ insistence that his company be taken public. Buffett’s response: “Well, what if I buy the company”.

The deal was made in less than three weeks with minimal examination of accounts. More important to Buffett than detailed due diligence is the character of the person selling shares to him. He says the key question he asks on every deal is whether the seller “would take the money and go sit on a beach or stay and run the company”(Forbes (1998) “Flying Buffett”  September 20, 1998).

Santulli easily convinced Buffett that he would remain the driving force behind the firm. “I still think of it as my company,” Santulli told Forbes shortly after the merger.

Buffett has another question he always asks: Is this service worth the money to people? Regarding NetJets he concluded, “the answer in my book………………To read more subscribe to my premium newsletter Deep Value Shares – click here

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