Here's a comprehensive, step-by-step guide on how Warren Buffett took over Berkshire Hathaway.
How Did Warren Buffett Take Over Berkshire Hathaway? A Step-by-Step Guide to the "Cigar Butt" That Became an Empire
Have you ever wondered how one of the world's most successful investors, a man known for his calm and rational approach, ended up in control of a struggling textile company? It's a story full of twists and turns, a classic tale of a brilliant mind seeing value where others saw only decline, with a dash of emotional impulsiveness that Buffett himself later admitted was a mistake. But what a mistake it was! Let's unravel the fascinating journey of how a textile mill became a global powerhouse.
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| How Did Warren Buffett Take Over Berkshire Hathaway |
Step 1: The First Spark of Interest - Discovering the "Cigar Butt"
Imagine yourself in the early 1960s, a young, keen investor named Warren Buffett, running his investment partnership, Buffett Partnership Ltd. You're constantly searching for undervalued companies, applying the principles of your mentor, Benjamin Graham. Your strategy is to find "cigar butts" – companies that are a bit ugly and discarded, but still have one last puff of value left in them.
This is where our story begins. In 1962, Buffett came across Berkshire Hathaway, a New England textile manufacturer. The company was in a declining industry, losing money, and closing mills. Sounds like a terrible investment, right? Not to Buffett. He saw a classic Graham-style "net-net" opportunity. The company's stock was trading for around $7.50 per share, while its per-share working capital was over $10.25 and book value was over $20.20. In his eyes, buying the stock was like getting the company's assets for free.
He saw the company's management was using the cash from liquidating its closed mills to buy back its own shares. This was a clear sign of value being returned to shareholders, a move that Buffett found highly appealing. He began accumulating a position, anticipating that the company would continue to close mills and buy back shares, allowing him to sell his stock at a profit.
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Step 2: The Infamous Handshake and a Disappointing Offer
This is where the plot thickens. Things were going according to plan, until a surprising turn of events changed everything. Think about a time when a business deal you had been working on suddenly went sour due to a small, infuriating detail. That's exactly what happened to Buffett.
By 1964, Buffett's partnership owned about 7% of Berkshire Hathaway. The company's management, led by Seabury Stanton, had been closing more mills. At one point, Stanton asked Buffett at what price he would be willing to sell his stake. Buffett, confident in his analysis, said he would sell at $11.50 per share. Stanton agreed, sealing the deal with a handshake.
However, when the formal tender offer came in the mail, the price was a frustrating $11.375 per share - an eighth of a point less than what was agreed upon. This tiny difference, just 12.5 cents, was an insult to Buffett. He felt he had been chiseled. This was no longer just about a profitable investment; it was now a matter of principle.
Step 3: The Emotional Decision and the Takeover
Instead of simply selling his shares at a profit, as he had originally planned, Buffett's irritation got the better of him. Have you ever been so frustrated by someone's actions that you decided to take a completely different, and perhaps more aggressive, course of action?
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Angered by what he saw as a breach of trust, Buffett made a decision that he would later call "monumentally stupid" and driven by emotion, not logic. He decided not to tender his shares. Instead, he started buying more of Berkshire Hathaway's stock aggressively. He wasn't just looking for a profit anymore; he was aiming for control. He bought shares in the open market, pushing the price up. By early 1965, he had accumulated enough shares to gain a controlling interest in the company.
On May 10, 1965, Warren Buffett's partnership had accumulated a majority stake and successfully took over the management and control of Berkshire Hathaway. Seabury Stanton was ousted, and Buffett became the company's chairman and CEO. He had paid about $14.86 per share on average for his controlling stake, a price he had to pay due to his aggressive buying after the initial tender offer.
Step 4: The Transformation - From Textiles to a Conglomerate
Now that Buffett was in charge, what did he do with this struggling textile business? This is the most crucial part of the story, as it lays the foundation for everything Berkshire Hathaway is today.
Buffett knew that the textile business was a "dead horse," a declining industry with no real future. He had made a bad investment in the business itself, but a brilliant one in the corporate shell. He realized that he could use the capital from the textile operations to acquire other, more profitable businesses.
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The Insurance Engine: This was the masterstroke. In 1967, Buffett made his first major acquisition as CEO of Berkshire Hathaway, buying a small insurance company called National Indemnity. This was a turning point. Insurance companies generate a massive amount of "float" - money paid by policyholders for premiums that the insurer can invest until a claim is paid. This float became a perpetual source of capital for Buffett's acquisitions, a low-cost, virtually endless stream of money to invest.
A Capital Allocation Machine: Buffett didn't pour additional capital into the textile mills. Instead, he systematically used the cash flow and profits from the textile operations, and later from his insurance business, to buy other, more promising companies. He started buying businesses that had a sustainable competitive advantage, or what he famously calls a "moat."
The End of an Era: The textile operations of Berkshire Hathaway continued to struggle and were a drain on the company's capital for two more decades. Finally, in 1985, the last textile mill was shut down, marking the official end of Berkshire Hathaway's original business.
From that point on, Berkshire Hathaway was no longer a textile company. It was a capital allocation machine, a diversified conglomerate that held a vast portfolio of businesses, from insurance (GEICO) to candy (See's Candies) to railroads (BNSF Railway) and consumer goods (Coca-Cola).
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Step 5: The Legacy - A Lesson in Adaptability
Buffett often refers to his Berkshire Hathaway takeover as his biggest mistake. But it was also his greatest success. What's the lesson here?
The story of the Berkshire Hathaway takeover is a powerful testament to the power of adaptability and long-term vision. While the initial investment was driven by a classic value investing thesis, the subsequent takeover was an emotional reaction. However, Buffett's genius lay in his ability to turn a mistake into an opportunity. He didn't try to save a dying business; he used its corporate structure as a vehicle to build a new one.
This history is why today, when you look at Berkshire Hathaway, you don't see a textile company. You see a multinational conglomerate with a diverse portfolio of businesses and a massive stock portfolio, all built on the foundation of a "stupid decision" that was transformed into a legendary empire.
Related FAQ Questions
Here are 10 related FAQ questions with quick answers to help you delve deeper into this topic.
How to understand "float" in the insurance business? Float is the money that an insurance company holds from premiums paid by policyholders between the time the premiums are collected and the time claims are paid out. Buffett uses this capital to invest in other businesses and stocks.
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How to invest like Warren Buffett? To invest like Warren Buffett, focus on buying businesses, not just stocks. Look for companies with a strong, durable competitive advantage ("moat"), a history of consistent earnings, and excellent management. Hold for the long term and be patient.
How to find a "cigar butt" stock? A "cigar butt" stock is a company with a very low valuation, often trading below its liquidation value or book value. It's a dying business, but you can get it so cheaply that there's still a bit of value left to be extracted. This is a strategy Buffett later moved away from in favor of quality companies.
How to read Berkshire Hathaway's annual letter to shareholders? Buffett's annual letters are a goldmine of investment wisdom. You can find them on Berkshire Hathaway's official website. Read them to understand his philosophy, his thoughts on the economy, and the performance of his businesses.
How to buy Berkshire Hathaway stock? You can buy Berkshire Hathaway stock through a brokerage account. The company has two classes of stock: Class A (BRK.A), which is very expensive, and the more affordable Class B (BRK.B).
How to find a company's "moat"? A company's moat is its sustainable competitive advantage. Look for things like a strong brand, a low-cost production model, network effects (like credit card companies), or a high-switching cost for customers.
How to determine a company's book value? Book value is calculated as total assets minus total liabilities. It represents the value of a company's assets on its balance sheet. You can find this information in a company's financial statements.
How to calculate Return on Equity (ROE)? ROE is a key metric Buffett looks at. The formula is: ROE = Net Income / Shareholder's Equity. It shows how efficiently a company is using shareholder investments to generate profits.
How to follow Warren Buffett's acquisitions? You can follow Berkshire Hathaway's acquisitions and stock holdings by checking their quarterly 13F filings with the U.S. Securities and Exchange Commission (SEC). This report details their stock positions.
How to learn more about Warren Buffett's life and career? Read books like "The Snowball: Warren Buffett and the Business of Life" by Alice Schroeder or "Buffett: The Making of an American Capitalist" by Roger Lowenstein to get a detailed account of his life and investment journey.
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