Wednesday, November 30, 2005

Warren Buffett on business

When you buy a company, is it a selection process, or a voter-type process?

It’s selection that pulls the culture. And the culture evolves more or less. But selection you start with. The first thing I look at when somebody wants to sell me a business before making a decision—do they love the money or do they love the company? If somebody loves painting, they may make a lot of money selling paintings, but they’re going to keep painting. If they love playing golf, they may make a ton of money, but they’ll keep playing golf. Jack Nicklaus will be out on the Senior Tour, whatever. If they love the money, they’re going to take the money, and they’ll promise me they’ll go to work for awhile; then after six months, they or their spouse will say, “Why are you jumping out of bed at 7 in the morning? You spent 40 years building this business and now you have all the money in the world and you’re still doing the same thing as before just so you can send a lot of money to Omaha.”

I think that decision is the most important question I’ve got to ask. I ask questions about the economic characteristics of the business and the price I’m paying, but I don’t have any management in Omaha. We’ve got 16 people in Omaha and we’ve got 165,000 employees. So we just don’t have anybody to send out. We don’t have any firemen. So I have to count on the people who sell me the business, they take hundreds of millions of dollars, like Rich Santulli at NetJets and they’re still going to want to get up at 5:30 in the morning and Thanksgiving weekend when everyone’s in such hurry because they all want planes at the same time. Solving those problems and the thunder storms in the east and whatever it may be. And when they get all through at the end of the day, wanna do it again the next day.

We’ve had a problem frankly, in finding those kinds of people, because three-quarters of our managers, at least, have more money than they or their kids or their grandchildren will ever need. They’ve monetized a lifetime of work or maybe their parents’ work or their grandparents’ work. But they’ve monetized that when they handed the business to us. And now they’ve got an option. And if they love the business, they can’t stop. Why do I work? I can’t tell you how much I love what I do. I would pay a lot of money (of course we don’t want the shareholders to know)—but I would pay a lot of money to have this job. I mean, I would do it under any circumstances. But the truth is I could anything in the world that I want, but this is what I like doing. It has nothing to do with how much I get paid. It just has to do with two things. It has to do with me getting to do what I like to do the way I want to do it. If somebody was telling me what I had to do every day I’d be gone tomorrow. Why in the world would I want to do that with the kind of money I have if I was being told what I had to do and how I had to do it, and whether to part my hair on the right or the left, or what to wear to the office or anything like that. I’d just say goodbye.

And secondly, I like appreciation. I like the fact that by and large our shareholders are appreciative. I’ve got an audience that I like and that’s what causes me to work when I don’t need the money. It’s probably what will cause other people to work in the businesses that we buy, assuming they love the business to start with. So we let them run their own business to an extraordinary degree. And we applaud. And if they get applause from me they’re getting it from a knowledgeable audience. I mean, I know business and I know enough about business to know when applause is due and when it isn’t. So they’re getting it from a good critic, as far as they’re concerned. And they’re getting it from our shareholders in turn, because I pass along the reasons for applause. And that’s what causes people to love it. They’ve got to love what they do. There’s just no way around it. And if they don’t, money isn’t going to keep them.

And we’ve never had, well, since 1965 I don’t know how many businesses we’ve acquired, but dozens and dozens. And we have never had a CEO leave us for another job voluntarily. We’ve had to make a couple of changes in 35 years, except this year in one company where the founder brought in a CEO to work jointly with her and the two of them, it just didn’t work. And that was over in a couple of months. But both of them feel good about Berkshire and it just doesn’t work to have two people try to run that kind of business. And it usually doesn’t work, but sometimes it works very well. We’ve had cases where it does work very well. So there’s no magic to it, but you’d better be sure that they love the business in the first place and that you let them paint their own painting. I mean, I feel like I’m on my back, and there’s the Sistine Chapel, and I’m painting away; it’s my painting, and somebody says, “Why don’t you use more red instead of blue?” Goodbye. It’s my painting. And I don’t care what they sell it for. That’s not part of it. The painting itself will never be finished. That’s one of the great things about it.

And I like it when people say, “Gee, that’s a pretty good-looking painting.” To me, that’s what management is about. Management is getting things done through other people that you want to get done. The way you get it done through other people—is to get talented people and let them work in a way that causes them to be more excited about it than they’ve ever been before. And we get that. Flight Safety. Al Ueltschi started that in 1951 with $10,000. Here’s a guy that flew Lindbergh. He’s 85 years old now. He built his own business and he got a billion dollars worth of Berkshire stock as a matter of record. Here’s what else he does—he works seven days a week and he solved his problem when he sold the business to Berkshire some years ago. Because here he built this thing—it was his painting—and he worried about what’s going to happen when I die? I have a very simple rule. I say, look, you can sell this painting today and we’ll hang it in the Metropolitan Museum or you can sell it to some LPO operator and it will hang in a board room

Now if you want this painting you’ve spent your whole life on hanging in a board room, that’s fair enough. And maybe a few bucks is worth it. But we’ll put it in the Metropolitan Museum and we’ll name a special wing after it; and not only that, you go on and keep painting. And that’s what Al wants. And when he sold it to me, his life is better afterwards, because that’s the one thing he worries about. You worry about your children. It was too important, when he’d built this thing for 40 or 50 years. A line I used with him—I told him, look, don’t worry about it. If you die tomorrow, some 26-year-old trust officer is likely to auction the place off. And that drives him crazy. But you do want to know what happens to your family. You do want to know what happens to your business. And that filters out all kinds of other things. I mean, in the end we’ve never bought a business at an auction. It won’t happen. We’re not interested in that. They dress up the figures and do all these other things. It’s not going to happen. But we’ve got a filter so I don’t have to review a thousand to buy two or something like that. I’m probably looking at three to buy two or something of the sort because we have filters they pass through before we even think about it. And we make deals over the phone. We bought the McLain Company from Wal-Mart—22 billion in sales—but to complete the deal was 29 days. The CFO from Wal-Mart came up to Omaha. We talked for a couple of hours and we shook hands on a price. He called down there, came back and said okay. And he said, what due diligence do I realize? And I said, “I’ve just done my due diligence. I’ve asked you a few questions.” We closed it 29 days later. We’ve never had a deal that closed that fast before the one with Wal-Mart. They loved it and we loved it. We’ve got a great guy running it.

That’s what I want to do in life. I mean, I don’t want to go through buying things at auction and trying to find the MBAs that are coming out from other places. I’d rather just find four hundred diggers that want to keep playing the game.

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