Berkshire Hathaway: From Primordial Ooze to an Unimaginable Cosmos -- Excerpt from the first chapter of Andy Kilpatrick's "Of Permanent Value: The Story of Warren Buffett/2008 Cosmic Edition"

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The following is an excerpt from the first chapter of Andy Kilpatrick's "Of Permanent Value: The Story of Warren Buffett/2008 Cosmic Edition." The full, two-volume set can be purchased through Amazon.com here.

by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally.

    Out of the primordial ooze of dollars from a struggling textile mill called Berkshire Hathaway, Warren Buffett took some small cash streams and, using the investment wizardry honed during his early years working with limited funds, along with plain old stock-picking virtuosity, literally "spun" money through mergers and acquisitions. These financial maneuvers jump-started unequaled returns on capital, which were multiplied by the magic of compounding, creating today's Berkshire--an unimaginably large cosmos (hence the theme of the book).

With the roll of the years, today's Berkshire is a powerhouse generating earnings at a breathtaking pace of $2 billion to $3 billion per calendar quarter with a stock market value of more than $200 billion. This accomplishment, as it turns out, is of great value to more than just Buffett and Berkshire shareholders because Buffett has arranged for the bulk of his shares to "go back to society." This gift outright is the largest philanthropic donation in history. Ever!

From 1965 to 1985, Buffett's investments, such as See's Candies, The Washington Post, GEICO, and Nebraska Furniture Mart, while vastly different, had an overall connection: they were unwaveringly American.

On the other hand, Berkshire's emergence as a "cosmic" firm began in the 1990s with investments in Coca-Cola and Gillette (now part of Procter & Gamble). Although these are American companies, both conduct a big portion of their business overseas.

Berkshire's investees, including such bellwethers as Anheuser-Busch, ConocoPhillips, General Electric, Johnson & Johnson, Kraft Foods, UPS, and Wal-Mart, all have global reach. One could argue that Berkshire's billions of dollars invested in railroads such as Burlington Northern are part of the global supply chain. (Maybe this is part of a plan to ship Berkshire's huge variety of products throughout the cosmos.) Also, many of Berkshire's operating firms have assets overseas. For example, Berkshire's MidAmerican Energy has large utility holdings in the U.K., making it the third largest distributor of electricity there.

In addition, Berkshire, to better compete, has moved some of its operating businesses abroad, including some operations of its Dexter Shoe Companies, Fruit of the Loom, and Russell Corp.

In 1998, Berkshire bought General Re, a giant reinsurance company that conducts business worldwide, particularly in Europe. In 2003, Berkshire took a stake in PetroChina, an East-meets-West energy investment that has mushroomed into a winning investment of cosmic proportions, one that's now been sold for a profit in the billions.

Foreign investing has been building for years. "We probably bought our first non-U.S. stocks 50 years ago," Buffett said at Berkshire's annual meeting in 2007. Recently, stakes in international holdings have surfaced, with investments in Tesco, the U.K. grocery and retailing giant; in Diageo, which sells Guinness beer; and in POSCO, a South Korean steel firm which is the third largest in the world. Also, Berkshire has a handful of British and Japanese stocks which are below the threshold of its disclosure requirements. And Berkshire owns two German stocks. "We're looking everywhere but Antarctica," Buffett has said.

Believing the dollar would weaken because of the U.S. current account and trade deficits, Buffett set in motion a series of foreign currency buys earlier this decade. Most of those positions have been sold.

In Berkshire's 2005 Annual Report, Buffett said that a way to reinforce his bet that the dollar would weaken was "by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally." In 2006, hints emerged of more overseas investments and in 2007, hints about a foreign currency investment turned out to represent one in the Brazilian currency, the real.

Going Global

Berkshire's breakthrough moment of going global came in 2006 when it bought Iscar Metalworking Companies of Israel, which operates not only in that country but also in more than 60 countries around the world, particularly in fast-developing South Korea. Iscar opened a plant in China in late 2007. The Berkshire-Iscar merger was quickly ruled a "conglomerate merger."

Israeli authorities found that Berkshire companies already operating in their country were many. Gen Re provides insurance products there; Berkshire Hathaway Group offers annuity policies there; Scott Fetzer Companies sells vacuum cleaners and compressors; NetJets, a fractional jet service, flies there; Shaw provides carpets and flooring; and Berkshire's CTB International, which makes systems for poultry, hog, and egg production, bought a small Israeli firm called AgroLogic several days after the Berkshire-Iscar announcement. Indeed, all these companies do business in Israel.

As Berkshire develops a worldly face, its shareholder base, too, is taking on an increasingly international look. In addition to representation from all 50 U.S. states, about 600 people from foreign lands were among the 27,000 attendees who made the odyssey to Berkshire's annual meeting in Omaha in 2007. The two people at stage center were kindly aliens from remote parts of the cosmos.

A final aspect of Berkshire's cosmic proportions came with Buffett's announcement in June 2006 that he would be giving most of his wealth to the Bill and Melinda Gates Foundation, now a philanthropic leviathan, which touches lives throughout the world by fighting AIDS and enhancing health in Third World countries. As Buffett follows through with this commitment, he is fulfilling his expressed desire that the bulk of his fortune go not only to American society but also to the world at large. Buffett has orchestrated an international company so strikingly successful that he and other shareholders can make meaningful contributions in areas of great need throughout the world. This announcement was the incandescent, culminating event -- of permanent value.

The gift is growing since Berkshire's stock hit $100,000 per share on October 5, 2006 and even momentarily pierced $150,000 per share in late 2007, closing the year at $141,600. Those figures are instantly understood anywhere in the cosmos.

Buffett giving his enormous fortune to an already existing, up-and-running foundation is classic Buffett--why reinvent the wheel and why self-aggrandize when a needed process that is accomplishing your goal of improving life for many throughout the world is already in place and being so superbly run?

Going Cosmic

In light of a $7 billion groundbreaking arrangement in 2006 to take over the remaining insurance liabilities held by thousands of Lloyd's of London "Names,'' Berkshire truly blossomed into a real live international company, even a cosmic company.

Finally, late on Christmas Day 2007, Berkshire announced it planned to buy 60% of Marmon Holdings for $4.5 billion from Chicago's Pritzker family and that it would buy the rest of the company in stages over the next five or six years.

Marmon Holdings is a privately held company and an international association of more than 125 manufacturing and service businesses with total sales of about $7 billion a year. Marmon employs about 21,000 people at more than 250 facilities mainly in North America, the United Kingdom, Europe, and China.

Reminiscent of baseball's Ernie Banks cry of "Let's play two," Berkshire, days after its Marmon announcement, started a bond insurance company--Berkshire Hathaway Assurance Corp. Doubling up on the breaking news for the day, Berkshire, in yet another plot twist, agreed to buy the reinsurance unit of Dutch banking and insurance company ING for $440 million.

Berkshire's bond-insurer, which will write insurance for municipal bonds, is seeking business from local governments at a time of a threat of possible slippage in credit ratings for other insurers during a huge credit crisis. Berkshire's bond-insurer opened for business in New York on December 31, 2007. Buffett told The Wall Street Journal (December 28, 2007) that Berkshire also will seek to do business in California, Puerto Rico, Texas, Illinois, and Florida. The appeal of doing business with Berkshire would be its Triple-A credit.

Berkshire could be due for a name change to Berkshire Hathaway International, an investment engine focused on the world: that is, focused on the cosmos.

(Berkshire, reluctant to hire many folks at headquarters, now has a Manager of International Tax, Marilyn Weber. Maybe she'll earn a promotion to Cosmic Tax Manager.)

Barron's, whose coverage of Berkshire over the years has ranged from spotty (the "Warren, What's Wrong?" cover story of December 27, 1999 comes to mind) to spot-on, announced in a cover story of September 8, 2007 that its annual survey of the business landscape concluded that Berkshire is "the most respected company in the world." Beyond that, Berkshire was becoming All-Powerful Oz.

Few yet recognize the possibility of Berkshire's future growth, growth that is not limited to any one product, any one industry or even to any one country--as this business supernova expands far into the galaxy. Not into a galaxy far, far away, but right here under our noses. Right now.

In keeping with all the above, in late 2007, Buffett traveled to Canada for a fund-raiser and to China and Korea to have a look at Iscar plants. The publicity was worldwide from scores of reporters following the events.

On leaving China, Buffett, better known than any person in the global investment community, waved and told CNBC's Becky Quick, "I'd say goodbye in Chinese, but then I'd be showing off."

The full 2 volume set can be purchased through Amazon.com here.

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Andy Kilpatrick
AKPE
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