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Berkshire Hathaway of the Internet

432 points by pknerd 10y ago

markgavalda 10y ago
This is awesome! I can imagine these kind of buyouts becoming really popular in the future. The usual process (detailed in the post) is awful and has to be disrupted.
quanticle 10y ago
Are the emoji on every list item really necessary? I find that they don't add any meaning to the post, and they're just distracting.
- jlgaddis 10y ago
  To share an alternative viewpoint, I read your comment and wondered "what emoji?". I had to go back and skim over the article again -- and reading it in full -- to see what you were referring to. In other words, I really didn't even notice them. To me, at least, they certainly weren't a distraction at all; in fact, just 30 seconds after closing out that tab I didn't recall seeing them in the first place.
  - jlgaddis 10y ago
    Edit: s/and reading it/after reading it/
- deleted 10y ago
  [deleted]
- ruleabidinguser 10y ago
  Personally I didn't mind them. Like the other poster said, I'd already forgot about them when I read your post.
- bbcbasic 10y ago
  Where's your sense of fun?
- Exuma 10y ago
  It's fun, lighten up.
bradgessler 10y ago
Its brilliant. Andrew wrote the post in a way that makes it feel so obvious, even though its not. Reading it felt analogous to some of early 2000's YC writings and coverage.
tim333 10y ago
Buffett's own writing on selling him your business is quite interesting. "Appendix B" at the end of the 1990 letter http://www.berkshirehathaway.com/letters/1990.html http://www.berkshirehathaway.com/letters/1990.html
- ruleabidinguser 10y ago
  I wonder what the good reason to sell is that he described. Like he pointed out, when you sell youre moving your safe assets to risky assets. Odd.
  - aeden 10y ago
    Diversification perhaps? WEB clearly believes in the power of owning multiple businesses, perhaps he is just extrapolating from his own success that others are interested in following his lead?
    - ruleabidinguser 10y ago
      Yea that does make sense actually.
  - hxta98596 10y ago
    > when you sell youre moving your safe assets to risky assets That's not exactly what he is saying nor what he means. Both are risky assets. A 100% owned business you deeply understand is still a very risky asset. On its own. I agree with aeden's comment that diversification is one of the main reasons to sell. The other good reason to sell...you get cash! Sure some of the cash will "probably" go to a diversified stock portfolio but some of it will be spent on cool stuff. You can't use stocks to buy your dream vacation home or donate money to charity for it to be spent on medical research. Cash is also the reason to sell. Lastly, people die. A business founder must sell the business or give it to someone else at some point in one way or another or it will be done for him or her.
    - ChefDenominator 10y ago
apapli 10y ago
It sounds great, but I'm not sure the space needs to be "disrupted". I get it that there are a number of steps needed to buy a business, but this isn't exactly buying a chocolate bar from the supermarket where all we need to check is the "best before" date has not passed. Proper, thorough, due diligence takes time, and knowing how much you are paying for a business versus how much you are handing over for goodwill (which is far from guaranteed) is hard, let alone being able to understand cultural fit, internal politics, market forces and the myriad of other internal and external factors that all influence a business on a daily basis. Warren Buffet apparently does it quickly (I didn't check beyond the claim in this article), but he has a talent for it, and I will guess a fairly large research team that are fully prepared and informed before they approach a prospective target. Comparing Warrent Buffets approach to this service to me comes off like a very well-intentioned but frankly naive initiative. Of course, if the author is planning to buy businesses at a massive discount to what they are truly worth then he indeed can probably skip some of the diligence - but that's a pretty poor outcome for the seller.
- valuearb 10y ago
  Warren's key competency is recognizing and valuing good businesses, he's not farming that out to any research team, even his own employees. Buffet has 24 total people at corporate, mostly finance people working on tax returns and a CFO obviously. Warren evaluates the business, values it, makes the offer, and relies on his CFO I believe to do basic due diligence and close the deal. But the key value Warren relies on is "moat" and that's a hard one to quantify for many tech businesses. Warren can buy a chain of furniture store because he thinks they are run well, efficiently but most importantly have a strong moat because of a great brand and locations in their market. So he can be confident the business will be around in decades. Will a web development company be? Will the web be? Those are harder questions and make applying Buffett's techniques far harder in this market, even if author had similar skills to Buffett, which is also very unlikely.
crdb 10y ago
The TL;DR: if you skip the admin and due diligence of a deal, you will close more deals. For example: "I couldn’t understand why buyers felt they needed to dig into accounting minutiae". However, to paraphrase something I read from a sailor, "every regulation in the Navy is written in the blood of your predecessors". If you do 10 deals, one might wipe out any upside from the other 9, even if you got more upside by negotiating a better valuation, and having a faster turnaround and lower cost of doing business. And of course, if a buyer got the reputation of not doing due diligence, it would attract all the problematic companies. There is a reason behind every "annoying" stage, and those reasons collectively explain why the entire industry is made of buyers that follow those stages. Since he runs 10 businesses, it is probable that the author has other ways of doing the work. He will keep track of most of the promising names in his industry, he will have a network of insiders to keep him appraised of the real story in those companies (although never officially), and he will know when the timing is ripe. His good relationship with his existing bankers means financing will be quick and standardised already, his back office experienced and streamlined. His experience tells him how you can play with what numbers to present a rosier picture than the reality, as well as how much to offer to get a founder to come to a quick decision. Unless he decides to go buy palm oil crushing plants in Indonesia, it might work out quite well.
- dchest 10y ago
  As far as I understood the linked post, that's an incomplete tl;dr. You missed these important parts: 1) In the words of Buffet, "there would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed)" [https://news.ycombinator.com/item?id=13906176 https://news.ycombinator.com/item?id=13906176]. Most of such re-negotiations can only be explained by screw ups in the decision making process or dishonesty of the acquirer trying to squeeze more from the tired owners. 2) Not screwing with the acquired businesses: they buy companies because they know their owner-managers are what made these companies successful, so it would be a stupid decision to replace them or change their operations.
  - 10y ago
rimliu 10y ago
The best thing about Berkshire Hathaway in the context of internet is their website. I've given it as example numerous times.
zekkius 10y ago
This post wholly ignores why Berkshire Hathaway is successful. The company is not successful because they make selling companies to them easy. They are successful because they buy good, cash rich businesses and find excellent management to run them.
- djrogers 10y ago
  The post isn't about why Berkshire Hathaway is successful, it's about why their acquisition process is successful. Totally understandable to focus on the latter and gloss over the former in that case.
jacques_chester 10y ago
Berkshire Hathaway derives no small part of its advantage from extremely cheap internal financing (insurance float) and very small leadership organisation (Buffet and Menger). I don't think this yet qualifies as the Buffet of Baud. But I admire the excellent marketing.
amix 10y ago
I doubt The Berkshire Hathaway is successful because of their processes. They are successful because Buffet and Munger are geniuses in their respective field and to build the internet version of The Berkshire Hathaway, you would probably need to copy the wisdom and not merely their processes. There’s an interesting video about how Magnus Carlsen makes his chess moves. He makes the next move in seconds and then thinks if it’s the right move, ref: https://www.youtube.com/watch?v=PZFS0kewLRQ https://www.youtube.com/watch?v=PZFS0kewLRQ -- And maybe Buffet does a similar thing, he can look at balance sheets and quickly decide if it's a business worth buying or not.
- Lordarminius 10y ago
  > I doubt The Berkshire Hathaway is successful because of their processes.... Buffet and Munger are geniuses Numerous writers in different fields have debunked this myth. Starting with Taylor in organization theory [1] It is the process that matters, not some undefined 'talent' 1. https://en.wikipedia.org/wiki/Organizational_theory https://en.wikipedia.org/wiki/Organizational_theory
  - Spooky23 10y ago
    If that were true, there would be many more successful conglomerates like Berkshire Hathaway. Processes are ante into the game, great process and lousy leadership will fail.
    - Lordarminius 10y ago
      There ARE many more successful conglomerates like BRK. Many, many, more.
      - Spooky23 10y ago
        Not that provide the same returns.
      - adventured 10y ago
        No there are not in fact "many, many, more" and you can't name them accordingly. There are exceptionally few, massive, successful conglomerates. So few that there are only a handful of them in the entire $19 trillion US economy. In the entirety of all global business today, there are only a few dozen conglomerates large enough to make either the US or global equivalent of the Fortune 500 in terms of sales. The majority of those conglomerates exist not due to a special process or skill, instead they exist due to vast amounts of time and wannabe empire building managements (eg General Electric). GM was a classic example of that wannabe empire building. They tried to build a conglomerate and it went poorly. They acquired companies like Hughes and EDS. More often you get outcomes like GE's empire building which nearly bankrupted the company and required a bailout to keep them from collapse. Sony is another classic example of a failed attempt at a conglomerate empire.
phkahler 10y ago
Finally the reason for the different approach is covered in the P.S. at the end: >> They are fiduciaries managing money for huge institutional investors. Most of the due diligence is the intermediary covering their ass. In fact, a huge institutional investor is also an intermediary for a bunch of other people and they like to cover their ass. It's all about minimizing risk of getting sued by someone.
mooreds 10y ago
Where's the float? One of the reasons BH has an advantage is their insurance business, which throws off large amounts of investible capital. He talks about how special and important the insurance businesses are in his annual letters. They make it easier for Buffet to be patient or to handle bad deals. Does Tiny have access to this, or something like it? Maybe existing SaaS products that have very high gross margins?
- tankenmate 10y ago
  Well it doesn't "throw off" so much as provide capital that is available for the medium term; sooner or later the float is eaten into by paying out claims. So, by this standard any cash flow positive business will help in this regard. What sets insurance apart is that, all things being equal, insurance is very cash flow positive (quite frequently in terms of years). Obviously some insurance companies realise this and provide a discount on their premiums as they factor this forward liquidity into their pricing; Warren Buffet has said many times that he does everything he can not to follow such (excessive) discounting.
- valuearb 10y ago
  Yea, float is over-rated as a BH advantage. It's simply a low cost short term loan, over many years it's even a negative interest loan, but in bad years it costs lots of real money. He has to keep money ready to repay float when insurance subs need it, or regulators would shut them down. So it can't be directly invested in long term equities. Any investor who wanted to ape Warren could borrow against 20% of their portfolio and achieve a similar "advantage". You shouldn't borrow more because one day the market will drop 50% and you could have your entire portfolio liquidated at the worst possible time. And obviously borrowing doesn't help if you aren't a skilled investor, if you are paying 7% to try to earn 8% the extra return isn't worth the risk. But if you are the next Buffett with the skill to average over 30% a year for your first decade with a smaller portfolio, it's a reasonable strategy.
zbruhnke 10y ago
Am I the only one here looking at Tiny's site and wondering when they acquired buffer? I didn't know it was sold and can't seem to find an announcement anywhere?
- jswny 10y ago
  Well they say "We start, invest in and buy wonderful internet businesses. Here’s a few of them..." so maybe they are just an investor in Buffer?
  - zbruhnke 10y ago
    Ah! Good catch you're probably right ... it should probably be more clear on their site which ones they own a majority stake in and which ones they are a minority stakeholder in
    - 55555 10y ago
      > it should probably be more clear on their site which ones they own a majority stake in and which ones they are a minority stakeholder in I agree that they are vague, but that's sort of their personal business. I don't think they owe anyone that information.
    - JohnnyConatus 10y ago
      I don't know if this is true in Tiny's case but many VC firms do this intentionally to mislead people into thinking they're a large investor in big hits. I.e., they'll put in a relatively small amount of money (and overpay) in a later round for a unicorn like Uber just so they can have the Uber logo on their site.
Exuma 10y ago
As someone currently selling their internet company for several million... I could definitely appreciate a BH type buyer.
tardo99 10y ago
lol
tardo99 10y ago
lol
nrao123 10y ago
This is what I wrote to a friend in an email on this post: A few challenges with the trying to replicate the Berkshire model on the internet: ##Lower cost of Capital (Float): One of the unsaid rules of BK is that their cost of capital is cheaper than most operating companies because of thier insurance float (Ajit Jain, General RE, GEICO etc). So, they can take an existing business & assume absolutely no changes to their changes & still make better ROI because their capital structure is more efficient. It is a different matter that they take portfolio companies like BNSF & use float to expand their capital projections (this is like making a private investment vs a public investment. From the BK 2015 Letter on how capex is linked to float: After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent. BNSF is the largest of our “Powerhouse Five,” a group that also includes Berkshire Hathaway Energy, Marmon, Lubrizol and IMC. Combined, these companies — our five most profitable non-insurance businesses — earned $13.1 billion in 2015, an increase of $650 million over 2014.* ##Bullet proof Revenue (Moat): One of the operating assumptions behind BK's acquisition is that the business does well regardless of management. Therefore, if the revenue assumptions hold (i.e. this is the moat part of the strategy)- then the float kicks in & does magic. However, the challenge with using a BK model in tech i.e. acquiring companies & being hands off without PRODUCT ENERGY- the products atrophy & revenues goes. The reason that BK hates tech is because there is moats are hard to sustain & it is too competitive. I am looking at Tiny's portfolio: http://www.tiny.website/ http://www.tiny.website/ & I am hard pressed to think of any product that has moat. I would suspect that once the founder leaves in almost all of these cases, the products will atrophy.
- hobofan 10y ago
  > One of the operating assumptions behind BK's acquisition is that the business does well regardless of management Is that the case? I am currently reading the collection of Warren Buffets' Annual Letters to the Shareholders (https://www.amazon.com/Berkshire-Hathaway-Letters-Shareholders-Buffett/dp/0615975070 https://www.amazon.com/Berkshire-Hathaway-Letters-Shareholde...) and in every letter, he attributes a significant part of the success of their companies to good management.
bluetwo 10y ago
I think every time someone uses a comparison to Warren Buffet or Berkshire Hathaway to market their own product, they should pay WB a commission. That said, it should be noted that WB doesn't like tech companies and invests in very few. He likes businesses that have steady cash flow, containable costs, and reliable yield/growth. This isn't tech.
- the-dude 10y ago
  Mouser.com is a Berkshire Hathaway company.
  - djrogers 10y ago
    And mouser is fundamentally a retail company, not a tech company.
  - bluetwo 10y ago
    Like I said, very few. This mouser is more a retail play than a tech play. He also invests in IBM and Apple, both of which have yields to justify the investment. Don't expect to see him put money into Facebook/Twitter/Snap/GoPro/Twillo any time soon.
tptacek 10y ago
Lots of people here pointing out that BRK's buying strategy isn't what distinguishes their business so much as their access to insurance float. That's a good point, probably the most important one. Also worth looking at is the relative contribution of these kinds of acquisitions to BRK's overall performance. Simply put, it's not Borsheim's and See's Candy that give BRK.A a $425B market cap. There's an enormous portfolio of high-ticket investments --- many of them in gigantic public companies --- that dwarf these mom-and-pop acquisitions. Even among the wholly owned subsidiaries, and even in the smaller "Manufacturing and Retail" segment, contributions are dominated by very large companies like Clayton Homes. Noted below in the thread, the "powerhouse five" of Berkshire's portfolio: BNSF Railroads, IMC (one of the largest metalworking companies in the world), Lubrizol, Berkshire Energy, and Marmon (one of the largest home builders in the US). I doubt very much the acquisition of any of these companies followed the casual pattern listed in the post. Some of them weren't even acquired all at once. Finally: having twice been involved in the sale of a company I was a principal at, the acquisition process was pretty unlike the breakdown this person provided. It was somewhere in between what he reports Buffett's process to be and what he claims the normal process is. The actual decision --- getting to an MOU with a notional price --- was reasonably informal and didn't take up much time. Certainly nobody did a road show. The rest of the process was legal, and I very much doubt Berkshire avoids much of that work either.
- valuearb 10y ago
  As I've said separately, I believe BRK's float is over-rated. It's just a loan and only a small part of their capital base. But your focus on the "powerhouse five" over See's Candy's is backwards. The powerhouse 5 are all very new acquisitions, and were purchased in part because See's candies was so amazingly successful as an investment. In 2011, Buffett said that See's had directly earned $1.65B for Berkshire since it's acquisition. Those earnings were reinvested in Berkshire, so over the years they've probably added as much as $10B to Berkshire's value. That's enough to have enabled the purchase of one of the "power house 5" by itself.
  - nrao123 10y ago
    Not sure why you believe float is over-rated. Buffet himself has said that a $1 in float is equal to a $1 of value. BH's market cap is about $300 BN & their float is about $90BN which means Buffett considers the float to be about ~25-33% of the total value of BH. Another measure of Mr. Buffett’s firepower: Berkshire Hathaway’s insurance float, paid in premiums that can be invested until claims have to be paid. Float was about $89 billion on March 31 2016, compared to about $88 billion at the end of 2015. http://blogs.wsj.com/cfo/2016/05/09/at-berkshire-hathaway-cash-tumbles-as-float-inches-up/ http://blogs.wsj.com/cfo/2016/05/09/at-berkshire-hathaway-ca...
Animats 10y ago
Berkshire Hathaway buys successful operating companies, preferably with a long history. They look at GAAP earnings, assets, and debt. Evaluating such companies is straightforward. This simplifies acquisitions. They rarely buy "growth companies". Those are speculative investments.
louprado 10y ago
> he has amassed a collection of over 65 wholly owned companies Just a side note, the above likely referenced this Wikipedia page[1], but it misses that MiTek, which is listed on that page, represents holdings of another 20 companies that aren't on that page. I didn't research if other BRK company are also holding companies. I currently consult for two companies, a PaaS company and a CRM/SaaS company. Both were recently purchased by MiTek and focus on the Builder Industry. They both continue to operate independently as do the other companies held by MiTek. This follows the traditional BRK business approach to keep the existing management and corporate culture in place of the acquired company. Prior to that acquisition I thought the BRK team was not tech savvy. I can tell you first hand (at least when it comes to the MiTek team) that is not the case. [1]https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berkshire_Hathaway https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berksh...
- valuearb 10y ago
  The MiTek people may be tech savvy, almost certainly Buffetts sign off for their purchases is cursory, if they think it benefits their business and purchase price was reasonable. Berkshire recently bought Apple stock but I believe that was done by two young investment managers he lets manage smaller parts of the Berkshire portfolio. Buffett is clearly more tech savvy than he lets on, but his objection to tech investments is he doesn't think he can identify durable competitive advantages there. It's certainly harder.
akhatri_aus 10y ago
I immediately thought of Naspers. Not a single mention of it still.

432 points by pknerd 10y ago

This is awesome! I can imagine these kind of buyouts becoming really popular in the future. The usual process (detailed in the post) is awful and has to be disrupted.

quanticle 10y ago

Are the emoji on every list item really necessary? I find that they don't add any meaning to the post, and they're just distracting.

jlgaddis 10y ago
To share an alternative viewpoint, I read your comment and wondered "what emoji?". I had to go back and skim over the article again -- and reading it in full -- to see what you were referring to. In other words, I really didn't even notice them. To me, at least, they certainly weren't a distraction at all; in fact, just 30 seconds after closing out that tab I didn't recall seeing them in the first place.
- jlgaddis 10y ago
  Edit: s/and reading it/after reading it/
deleted 10y ago
[deleted]
ruleabidinguser 10y ago
Personally I didn't mind them. Like the other poster said, I'd already forgot about them when I read your post.
bbcbasic 10y ago
Where's your sense of fun?
Exuma 10y ago
It's fun, lighten up.

bradgessler 10y ago

Its brilliant. Andrew wrote the post in a way that makes it feel so obvious, even though its not. Reading it felt analogous to some of early 2000's YC writings and coverage.

tim333 10y ago

Buffett's own writing on selling him your business is quite interesting. "Appendix B" at the end of the 1990 letter http://www.berkshirehathaway.com/letters/1990.html http://www.berkshirehathaway.com/letters/1990.html

ruleabidinguser 10y ago
I wonder what the good reason to sell is that he described. Like he pointed out, when you sell youre moving your safe assets to risky assets. Odd.
- aeden 10y ago
  Diversification perhaps? WEB clearly believes in the power of owning multiple businesses, perhaps he is just extrapolating from his own success that others are interested in following his lead?
  - ruleabidinguser 10y ago
    Yea that does make sense actually.
- hxta98596 10y ago
  > when you sell youre moving your safe assets to risky assets That's not exactly what he is saying nor what he means. Both are risky assets. A 100% owned business you deeply understand is still a very risky asset. On its own. I agree with aeden's comment that diversification is one of the main reasons to sell. The other good reason to sell...you get cash! Sure some of the cash will "probably" go to a diversified stock portfolio but some of it will be spent on cool stuff. You can't use stocks to buy your dream vacation home or donate money to charity for it to be spent on medical research. Cash is also the reason to sell. Lastly, people die. A business founder must sell the business or give it to someone else at some point in one way or another or it will be done for him or her.
  - ChefDenominator 10y ago

apapli 10y ago

It sounds great, but I'm not sure the space needs to be "disrupted". I get it that there are a number of steps needed to buy a business, but this isn't exactly buying a chocolate bar from the supermarket where all we need to check is the "best before" date has not passed. Proper, thorough, due diligence takes time, and knowing how much you are paying for a business versus how much you are handing over for goodwill (which is far from guaranteed) is hard, let alone being able to understand cultural fit, internal politics, market forces and the myriad of other internal and external factors that all influence a business on a daily basis. Warren Buffet apparently does it quickly (I didn't check beyond the claim in this article), but he has a talent for it, and I will guess a fairly large research team that are fully prepared and informed before they approach a prospective target. Comparing Warrent Buffets approach to this service to me comes off like a very well-intentioned but frankly naive initiative. Of course, if the author is planning to buy businesses at a massive discount to what they are truly worth then he indeed can probably skip some of the diligence - but that's a pretty poor outcome for the seller.

valuearb 10y ago
Warren's key competency is recognizing and valuing good businesses, he's not farming that out to any research team, even his own employees. Buffet has 24 total people at corporate, mostly finance people working on tax returns and a CFO obviously. Warren evaluates the business, values it, makes the offer, and relies on his CFO I believe to do basic due diligence and close the deal. But the key value Warren relies on is "moat" and that's a hard one to quantify for many tech businesses. Warren can buy a chain of furniture store because he thinks they are run well, efficiently but most importantly have a strong moat because of a great brand and locations in their market. So he can be confident the business will be around in decades. Will a web development company be? Will the web be? Those are harder questions and make applying Buffett's techniques far harder in this market, even if author had similar skills to Buffett, which is also very unlikely.

crdb 10y ago

The TL;DR: if you skip the admin and due diligence of a deal, you will close more deals. For example: "I couldn’t understand why buyers felt they needed to dig into accounting minutiae". However, to paraphrase something I read from a sailor, "every regulation in the Navy is written in the blood of your predecessors". If you do 10 deals, one might wipe out any upside from the other 9, even if you got more upside by negotiating a better valuation, and having a faster turnaround and lower cost of doing business. And of course, if a buyer got the reputation of not doing due diligence, it would attract all the problematic companies. There is a reason behind every "annoying" stage, and those reasons collectively explain why the entire industry is made of buyers that follow those stages. Since he runs 10 businesses, it is probable that the author has other ways of doing the work. He will keep track of most of the promising names in his industry, he will have a network of insiders to keep him appraised of the real story in those companies (although never officially), and he will know when the timing is ripe. His good relationship with his existing bankers means financing will be quick and standardised already, his back office experienced and streamlined. His experience tells him how you can play with what numbers to present a rosier picture than the reality, as well as how much to offer to get a founder to come to a quick decision. Unless he decides to go buy palm oil crushing plants in Indonesia, it might work out quite well.

dchest 10y ago
As far as I understood the linked post, that's an incomplete tl;dr. You missed these important parts: 1) In the words of Buffet, "there would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed)" [https://news.ycombinator.com/item?id=13906176 https://news.ycombinator.com/item?id=13906176]. Most of such re-negotiations can only be explained by screw ups in the decision making process or dishonesty of the acquirer trying to squeeze more from the tired owners. 2) Not screwing with the acquired businesses: they buy companies because they know their owner-managers are what made these companies successful, so it would be a stupid decision to replace them or change their operations.
- 10y ago

rimliu 10y ago

The best thing about Berkshire Hathaway in the context of internet is their website. I've given it as example numerous times.

zekkius 10y ago

This post wholly ignores why Berkshire Hathaway is successful. The company is not successful because they make selling companies to them easy. They are successful because they buy good, cash rich businesses and find excellent management to run them.

djrogers 10y ago
The post isn't about why Berkshire Hathaway is successful, it's about why their acquisition process is successful. Totally understandable to focus on the latter and gloss over the former in that case.

jacques_chester 10y ago

Berkshire Hathaway derives no small part of its advantage from extremely cheap internal financing (insurance float) and very small leadership organisation (Buffet and Menger). I don't think this yet qualifies as the Buffet of Baud. But I admire the excellent marketing.

amix 10y ago

I doubt The Berkshire Hathaway is successful because of their processes. They are successful because Buffet and Munger are geniuses in their respective field and to build the internet version of The Berkshire Hathaway, you would probably need to copy the wisdom and not merely their processes. There’s an interesting video about how Magnus Carlsen makes his chess moves. He makes the next move in seconds and then thinks if it’s the right move, ref: https://www.youtube.com/watch?v=PZFS0kewLRQ https://www.youtube.com/watch?v=PZFS0kewLRQ -- And maybe Buffet does a similar thing, he can look at balance sheets and quickly decide if it's a business worth buying or not.

Lordarminius 10y ago
> I doubt The Berkshire Hathaway is successful because of their processes.... Buffet and Munger are geniuses Numerous writers in different fields have debunked this myth. Starting with Taylor in organization theory [1] It is the process that matters, not some undefined 'talent' 1. https://en.wikipedia.org/wiki/Organizational_theory https://en.wikipedia.org/wiki/Organizational_theory
- Spooky23 10y ago
  If that were true, there would be many more successful conglomerates like Berkshire Hathaway. Processes are ante into the game, great process and lousy leadership will fail.
  - Lordarminius 10y ago
    There ARE many more successful conglomerates like BRK. Many, many, more.
    - Spooky23 10y ago
      Not that provide the same returns.
    - adventured 10y ago
      No there are not in fact "many, many, more" and you can't name them accordingly. There are exceptionally few, massive, successful conglomerates. So few that there are only a handful of them in the entire $19 trillion US economy. In the entirety of all global business today, there are only a few dozen conglomerates large enough to make either the US or global equivalent of the Fortune 500 in terms of sales. The majority of those conglomerates exist not due to a special process or skill, instead they exist due to vast amounts of time and wannabe empire building managements (eg General Electric). GM was a classic example of that wannabe empire building. They tried to build a conglomerate and it went poorly. They acquired companies like Hughes and EDS. More often you get outcomes like GE's empire building which nearly bankrupted the company and required a bailout to keep them from collapse. Sony is another classic example of a failed attempt at a conglomerate empire.

phkahler 10y ago

Finally the reason for the different approach is covered in the P.S. at the end: >> They are fiduciaries managing money for huge institutional investors. Most of the due diligence is the intermediary covering their ass. In fact, a huge institutional investor is also an intermediary for a bunch of other people and they like to cover their ass. It's all about minimizing risk of getting sued by someone.

mooreds 10y ago

Where's the float? One of the reasons BH has an advantage is their insurance business, which throws off large amounts of investible capital. He talks about how special and important the insurance businesses are in his annual letters. They make it easier for Buffet to be patient or to handle bad deals. Does Tiny have access to this, or something like it? Maybe existing SaaS products that have very high gross margins?

tankenmate 10y ago
Well it doesn't "throw off" so much as provide capital that is available for the medium term; sooner or later the float is eaten into by paying out claims. So, by this standard any cash flow positive business will help in this regard. What sets insurance apart is that, all things being equal, insurance is very cash flow positive (quite frequently in terms of years). Obviously some insurance companies realise this and provide a discount on their premiums as they factor this forward liquidity into their pricing; Warren Buffet has said many times that he does everything he can not to follow such (excessive) discounting.
valuearb 10y ago
Yea, float is over-rated as a BH advantage. It's simply a low cost short term loan, over many years it's even a negative interest loan, but in bad years it costs lots of real money. He has to keep money ready to repay float when insurance subs need it, or regulators would shut them down. So it can't be directly invested in long term equities. Any investor who wanted to ape Warren could borrow against 20% of their portfolio and achieve a similar "advantage". You shouldn't borrow more because one day the market will drop 50% and you could have your entire portfolio liquidated at the worst possible time. And obviously borrowing doesn't help if you aren't a skilled investor, if you are paying 7% to try to earn 8% the extra return isn't worth the risk. But if you are the next Buffett with the skill to average over 30% a year for your first decade with a smaller portfolio, it's a reasonable strategy.

zbruhnke 10y ago

Am I the only one here looking at Tiny's site and wondering when they acquired buffer? I didn't know it was sold and can't seem to find an announcement anywhere?

jswny 10y ago
Well they say "We start, invest in and buy wonderful internet businesses. Here’s a few of them..." so maybe they are just an investor in Buffer?
- zbruhnke 10y ago
  Ah! Good catch you're probably right ... it should probably be more clear on their site which ones they own a majority stake in and which ones they are a minority stakeholder in
  - 55555 10y ago
    > it should probably be more clear on their site which ones they own a majority stake in and which ones they are a minority stakeholder in I agree that they are vague, but that's sort of their personal business. I don't think they owe anyone that information.
  - JohnnyConatus 10y ago
    I don't know if this is true in Tiny's case but many VC firms do this intentionally to mislead people into thinking they're a large investor in big hits. I.e., they'll put in a relatively small amount of money (and overpay) in a later round for a unicorn like Uber just so they can have the Uber logo on their site.

Exuma 10y ago

As someone currently selling their internet company for several million... I could definitely appreciate a BH type buyer.

tardo99 10y ago

lol

tardo99 10y ago

lol

nrao123 10y ago

This is what I wrote to a friend in an email on this post: A few challenges with the trying to replicate the Berkshire model on the internet: ##Lower cost of Capital (Float): One of the unsaid rules of BK is that their cost of capital is cheaper than most operating companies because of thier insurance float (Ajit Jain, General RE, GEICO etc). So, they can take an existing business & assume absolutely no changes to their changes & still make better ROI because their capital structure is more efficient. It is a different matter that they take portfolio companies like BNSF & use float to expand their capital projections (this is like making a private investment vs a public investment. From the BK 2015 Letter on how capex is linked to float: After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent. BNSF is the largest of our “Powerhouse Five,” a group that also includes Berkshire Hathaway Energy, Marmon, Lubrizol and IMC. Combined, these companies — our five most profitable non-insurance businesses — earned $13.1 billion in 2015, an increase of $650 million over 2014.* ##Bullet proof Revenue (Moat): One of the operating assumptions behind BK's acquisition is that the business does well regardless of management. Therefore, if the revenue assumptions hold (i.e. this is the moat part of the strategy)- then the float kicks in & does magic. However, the challenge with using a BK model in tech i.e. acquiring companies & being hands off without PRODUCT ENERGY- the products atrophy & revenues goes. The reason that BK hates tech is because there is moats are hard to sustain & it is too competitive. I am looking at Tiny's portfolio: http://www.tiny.website/ http://www.tiny.website/ & I am hard pressed to think of any product that has moat. I would suspect that once the founder leaves in almost all of these cases, the products will atrophy.

hobofan 10y ago
> One of the operating assumptions behind BK's acquisition is that the business does well regardless of management Is that the case? I am currently reading the collection of Warren Buffets' Annual Letters to the Shareholders (https://www.amazon.com/Berkshire-Hathaway-Letters-Shareholders-Buffett/dp/0615975070 https://www.amazon.com/Berkshire-Hathaway-Letters-Shareholde...) and in every letter, he attributes a significant part of the success of their companies to good management.

bluetwo 10y ago

I think every time someone uses a comparison to Warren Buffet or Berkshire Hathaway to market their own product, they should pay WB a commission. That said, it should be noted that WB doesn't like tech companies and invests in very few. He likes businesses that have steady cash flow, containable costs, and reliable yield/growth. This isn't tech.

the-dude 10y ago
Mouser.com is a Berkshire Hathaway company.
- djrogers 10y ago
  And mouser is fundamentally a retail company, not a tech company.
- bluetwo 10y ago
  Like I said, very few. This mouser is more a retail play than a tech play. He also invests in IBM and Apple, both of which have yields to justify the investment. Don't expect to see him put money into Facebook/Twitter/Snap/GoPro/Twillo any time soon.

tptacek 10y ago

Lots of people here pointing out that BRK's buying strategy isn't what distinguishes their business so much as their access to insurance float. That's a good point, probably the most important one. Also worth looking at is the relative contribution of these kinds of acquisitions to BRK's overall performance. Simply put, it's not Borsheim's and See's Candy that give BRK.A a $425B market cap. There's an enormous portfolio of high-ticket investments --- many of them in gigantic public companies --- that dwarf these mom-and-pop acquisitions. Even among the wholly owned subsidiaries, and even in the smaller "Manufacturing and Retail" segment, contributions are dominated by very large companies like Clayton Homes. Noted below in the thread, the "powerhouse five" of Berkshire's portfolio: BNSF Railroads, IMC (one of the largest metalworking companies in the world), Lubrizol, Berkshire Energy, and Marmon (one of the largest home builders in the US). I doubt very much the acquisition of any of these companies followed the casual pattern listed in the post. Some of them weren't even acquired all at once. Finally: having twice been involved in the sale of a company I was a principal at, the acquisition process was pretty unlike the breakdown this person provided. It was somewhere in between what he reports Buffett's process to be and what he claims the normal process is. The actual decision --- getting to an MOU with a notional price --- was reasonably informal and didn't take up much time. Certainly nobody did a road show. The rest of the process was legal, and I very much doubt Berkshire avoids much of that work either.

valuearb 10y ago
As I've said separately, I believe BRK's float is over-rated. It's just a loan and only a small part of their capital base. But your focus on the "powerhouse five" over See's Candy's is backwards. The powerhouse 5 are all very new acquisitions, and were purchased in part because See's candies was so amazingly successful as an investment. In 2011, Buffett said that See's had directly earned $1.65B for Berkshire since it's acquisition. Those earnings were reinvested in Berkshire, so over the years they've probably added as much as $10B to Berkshire's value. That's enough to have enabled the purchase of one of the "power house 5" by itself.
- nrao123 10y ago
  Not sure why you believe float is over-rated. Buffet himself has said that a $1 in float is equal to a $1 of value. BH's market cap is about $300 BN & their float is about $90BN which means Buffett considers the float to be about ~25-33% of the total value of BH. Another measure of Mr. Buffett’s firepower: Berkshire Hathaway’s insurance float, paid in premiums that can be invested until claims have to be paid. Float was about $89 billion on March 31 2016, compared to about $88 billion at the end of 2015. http://blogs.wsj.com/cfo/2016/05/09/at-berkshire-hathaway-cash-tumbles-as-float-inches-up/ http://blogs.wsj.com/cfo/2016/05/09/at-berkshire-hathaway-ca...

Animats 10y ago

Berkshire Hathaway buys successful operating companies, preferably with a long history. They look at GAAP earnings, assets, and debt. Evaluating such companies is straightforward. This simplifies acquisitions. They rarely buy "growth companies". Those are speculative investments.

louprado 10y ago

> he has amassed a collection of over 65 wholly owned companies Just a side note, the above likely referenced this Wikipedia page[1], but it misses that MiTek, which is listed on that page, represents holdings of another 20 companies that aren't on that page. I didn't research if other BRK company are also holding companies. I currently consult for two companies, a PaaS company and a CRM/SaaS company. Both were recently purchased by MiTek and focus on the Builder Industry. They both continue to operate independently as do the other companies held by MiTek. This follows the traditional BRK business approach to keep the existing management and corporate culture in place of the acquired company. Prior to that acquisition I thought the BRK team was not tech savvy. I can tell you first hand (at least when it comes to the MiTek team) that is not the case. [1]https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berkshire_Hathaway https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berksh...

valuearb 10y ago
The MiTek people may be tech savvy, almost certainly Buffetts sign off for their purchases is cursory, if they think it benefits their business and purchase price was reasonable. Berkshire recently bought Apple stock but I believe that was done by two young investment managers he lets manage smaller parts of the Berkshire portfolio. Buffett is clearly more tech savvy than he lets on, but his objection to tech investments is he doesn't think he can identify durable competitive advantages there. It's certainly harder.

akhatri_aus 10y ago

I immediately thought of Naspers. Not a single mention of it still.