Welcome, aspiring investor! Have you ever wondered about the story behind one of the world's most successful conglomerates, Berkshire Hathaway, and how its legendary leader, Warren Buffett, came to own it? It's a fascinating tale that starts not with a grand financial strategy, but with a surprising turn of events in the textile industry. Let's dive into the details of how much Warren Buffett paid for Berkshire Hathaway and the unexpected journey that followed.
Step 1: The Initial Investment and a Ticking Clock
Did you know that Warren Buffett didn't initially intend to own a textile company? His journey with Berkshire Hathaway began in 1962, when he started buying shares for his investment fund, Buffett Partnership Ltd., at a price of around $7.50 per share. At the time, Berkshire Hathaway was a struggling textile manufacturing company in New Bedford, Massachusetts, on the brink of bankruptcy.
So, why would the "Oracle of Omaha" invest in a failing business?
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Buffett's interest was not in the textile business itself, but in the company's stock price. He noticed a pattern: each time one of the company's mills was closed, its stock price would move. He believed he could profit from this by purchasing shares at a discount and then selling them back to the company in a tender offer.
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| How Much Did Warren Buffett Pay For Berkshire Hathaway |
Step 2: The Infamous "Chiseling" Incident
This is where the story takes a dramatic turn. In 1964, Seabury Stanton, the then-chairman of Berkshire Hathaway, wanted to repurchase shares from Buffett. Buffett and Stanton had a verbal agreement for a sale price of $11.50 per share. However, when the formal tender offer arrived in the mail, the price was a quarter of a dollar less - $11.375 per share.
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Buffett was furious. He felt he had been "chiseled" on the price. His irritation and emotional reaction to this slight led him to make a decision that would change the course of his investment career and the future of the company.
Step 3: The "Buying Spree" and Taking Control
Instead of selling his shares, Buffett began an aggressive "buying spree," acquiring more and more Berkshire Hathaway stock. As a result, his investment company, Buffett Partnership Ltd., became the majority shareholder, and in 1965, he gained control of the company. He then famously fired Seabury Stanton.
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While the total price Buffett paid for control is not a single, one-time payment, we can look at the cost of the shares he acquired. He had paid about $8.3 million for a 49% stake in the company, with an average purchase price of $14.86 per share. It's important to remember that this wasn't a strategic decision to build a conglomerate from the start; it was a decision driven by emotion and a desire to teach a lesson.
Step 4: The Transformation from Textiles to a Conglomerate
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After taking control, Buffett's initial efforts to turn around the textile business were unsuccessful. He has since referred to the decision to buy the company as the "dumbest stock" he ever purchased and a mistake that "plagued them for two decades." He finally shut down the last of the textile operations in 1985.
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However, during this time, he began using Berkshire Hathaway as a holding company for other acquisitions, starting with the purchase of an insurance company, National Indemnity Company, in 1967. This marked the beginning of the company's transition from a struggling textile manufacturer to the massive, diversified conglomerate it is today.
10 Related FAQ Questions
Here are some quick answers to frequently asked questions about Warren Buffett's acquisition of Berkshire Hathaway:
How to calculate the value of Warren Buffett's initial stake? Warren Buffett gained control by purchasing about 49% of the shares, which amounted to a payment of about $8.3 million for 1.138 million shares at an average price of $14.86.
How to understand why he bought a failing company? He was not interested in the textile business itself, but in the stock's price fluctuations as the company closed its mills.
How to define the "chiseling" incident? This refers to the time when the company offered to buy his shares for slightly less than the verbally agreed-upon price, angering Buffett and leading him to take over the company.
How to describe the company's business before Buffett? Berkshire Hathaway was a textile manufacturer that had struggled for years and was facing financial difficulties.
How to explain why Buffett kept the textile business for so long? He felt obligated to try and make a go of the business after taking control, even though he knew the industry was declining.
How to describe the key turning point for Berkshire Hathaway? The acquisition of National Indemnity Company in 1967 marked the company's shift from textiles to insurance and other industries.
How to characterize Buffett's investment philosophy after this experience? The experience taught him to make decisions based on sound investment logic and to focus on buying wonderful businesses at a fair price, rather than just fair businesses at a wonderful price.
How to find the current price of Berkshire Hathaway stock? The Class A shares (BRK.A) and Class B shares (BRK.B) trade on the stock market.
How to summarize Buffett's view on the acquisition? He considers it his "dumbest stock purchase ever" because it was an emotional decision rather than a logical one.
How to trace the history of Berkshire Hathaway before Buffett? The company was formed from the 1955 merger of two Massachusetts textile firms, Hathaway Manufacturing Company and Berkshire Fine Spinning Associates.
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