Thursday, February 14, 2013

Warren Buffett Letter to Michael Dell (Imaginary)

Dear Michael,
Since you and I share the privilege of founding businesses which became public companies and leaders in their industries, I am writing to give you some of my thoughts on your proposed buyout deal and about deal-making in general.

Here's an excerpt from the Wall Street Journal about my latest monster deal,

Warren Buffet's latest monster deal, to buy H.J. Heinz for $28 billion including debt,HNZ +19.87% comes after the shares had risen in a pretty straight line over four years to an all-time high. And Berkshire HathawayBRKB +1.27% alongside partner 3G Capital of Brazil, added a 20% premium for good measure.The buyers are paying up for an iconic brand and a strong record of expansion—with 30 consecutive quarters of organic revenue growth largely as a result of its growing emerging-markets presence. The deal values Heinz at 13.8 times trailing earnings before interest, tax, depreciation and amortization. Campbell SoupCPB +1.41% by comparison, trades at 10.8 times.
I know that you, like Charlie Munger and I, appreciate the value of a dollar and the joy that comes from doing a sharp deal.   Remember the deal I offered to Goldman Sachs when the financial crisis put them at death's door?  It took me twenty minutes to commit $5 billion of my shareholders' money to a deal!  A ten percent preferred with warrants to purchase Goldman shares at $115 in a five year period. My mentor, Ben Graham, would have been proud: talk about a margin of safety plus!  My shareholders and I will make out like bandits, on a risk-adjusted basis, of course.

But, I also knew that Goldman could and would repay the debt as fast as they could, once the crisis ebbed and they took advantage of their bank charter and the problems among their weaker peers. It's a joy to drive a good deal, but you've got to make the deal suit the constituents and the circumstances.

Look at today's deal.  All the idiots on Wall Street (don't quote me) will say I overpaid.  Let me assure you, Charlie, myself and our Brazilian partners know what the iconic Heinz brand can be worth in a decade under focused, aggressive management with targeted incentives.  If I wanted to buy a bad business on the cheap, I would have bought Campbell's. I bought a great business, alongside great partners, for a fair price.

In retrospect, this deal will be much bigger bonanza for Berkshire shareholders than the quick return we got from Goldman Sachs, no question. With Heinz, we are going to build shareholder value, not pick up gold coins from the Street.

We did our homework as we watched the shares close on their all-time highs.  Paying a twenty percent premium is lower than it could have been, but Heinz shareholders have already had a good ride and my shareholders give Heinz shareholders a nice pourboire via the premium.  Everybody's happy. Everybody wins. Taking the offer is a no-brainer for shareholders and even for those parasitic arbitrageurs. No bad feelings, and no negotiating over another dollar on the offer price.  I don't negotiate in public, period.

Now, to your deal. Your shareholders have had a fairly miserable ride for quite some time. My friends at Southeastern Capital Management, who have also read my mentor Ben Graham's book, bought your stock in the same way that I am buying Heinz.  It's a good franchise that is undervalued for a variety of reasons, but which is in the process of turning itself around, partly due to some of the acquisitions you have made.

The deal you are offering your shareholders is a rubber truncheon kind of deal.  It's opportunistic for sure, and I commend you for that.  Your shareholders (and my friends) at Southeastern, T. Rowe Price and others will be taking a sharp stick in the eye.  So, your deal has winners and losers and creates bad feelings.  Why do it, Michael?

Forget about what your legal eagles and those bankers are telling you.  If you have the conviction and the stomach for turning your company around, craft a deal that is a no-brainer for your shareholders.  Be a mensch.  If you can do what you believe, then the value at the end of the trail will be worth far more than what you need to put on the table now.

I'm going to sign off now, because I need to work on my succession planning.  Talk about boring!  Call me if you want to discuss this.

Best regards,


cc. Eapen Chacko

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