Will Hambrick Head Berkshire Hathaway?
Mar01

Will Hambrick Head Berkshire Hathaway?

Warren Buffett’s annual letter to Berkshire Hathaway shareholders is out this week. Normally, the annual letter of one of the most widely read documents in the business world. This year, given that Warren Buffett has been in the news so much recently with the Buffett Rule and all, it is probably being perused more closely than usual. There is something for the chemical industry in the letter: On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain. I wrote up a small story in C&EN based on this passage. The idea being that Lubrizol is on the hunt for more small acquisitions. My boss, assistant managing editor Mike McCoy, had an even more interesting interpretation of the line “eager to expand his managerial domain.” Mike suggested that maybe “managerial domain” would extend to the whole of Berkshire Hathaway. In other words, perhaps Buffett has Hambrick in mind as a successor. I snickered at first. It seems like a crazy idea because it would have Buffett giving the keys to the kingdom to someone who has only been with the company since September. And Hambrick would go, in relatively short order, from running a mid-sized specialty chemical maker to heading all of Berkshire-friggin’-Hathaway. BUT…Mike isn’t the only one to so speculate. This well-reasoned article by Harry Wallop in the Telegraph puts Hambrick as one of four possible candidates along with BNSF CEO Matthew Rose, reinsurance chief Ajit Jain, and Geico boss Tony Nicely. The “eager to expand his managerial domain” appears in paragraph following the revelation that he has come up with an unnamed successor and two backup candidates. Why was James Hambrick the next thought to come to mind? The phrase “eager to expand his managerial domain” is a cutesy way of hinting at a successor. Warren Buffett is fully capable of cute. Here he is playing the ukulele on television. Another line from the letter that I would like to overanalyze is this: “James is a disciplined buyer and a superb operator.” That is an enormous compliment coming from Warren Buffett. Picking stocks and buying companies is what Warren Buffett does. Go to any business section of any book store and you’ll oodles of books on Buffett’s methods....

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Berkshire Details Sokol’s Lubrizol Scandal
May02

Berkshire Details Sokol’s Lubrizol Scandal

Berkshire Hathaway has put out a report on top exec David Sokol’s resignation in March over shares he purchased in Lubrizol before Berkshire’s takeover was announced. At the time, I was wrong on this blog when I said: “This seems to me a case of an appearance of conflict of interest rather than a real conflict of interest. Sokol thought Lubrizol was a good investment. He suggested that it would be a good investment for his company, too. Engineering an entire deal to make a tidy—albeit $3 million—profit would be the tail wagging the dog.” Turns out, according to the report, there was more to the story than that: He did not disclose: * the amounts and timing of his purchases; * the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol; * the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) had asked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and * the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board. Though, the report suggests that Sokol won’t have to exchange his pin stripes for prison stripes. We appreciate that at the time Mr. Sokol traded, he did not know whether Mr. Buffett would support, or reject, the idea of an acquisition of Lubrizol. We also recognize that Mr. Sokol did not know how Lubrizol would respond to an acquisition proposal if Berkshire Hathaway were to make one. We recognize the view that those uncertainties might have kept Mr. Sokol’s information below the level of probability required to support a finding of materiality for purposes of finding a violation of federal insider trading law. But the Trading Policy requires a higher standard of conduct than what is required to avoid being charged with a federal securities violation. I like the last sentence. It reminds me of the old Hebrew National commercials. My take: Why would someone blow their chance to be Warren Buffett’s successor for a measly $3 million? Berkshire doesn’t disclose Sokol’s salary or stock holdings in its proxies. In any case, I’m sure he’ll land on his...

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Berkshire Exec Resigns (Apparently) Over Lubrizol Bid
Mar31

Berkshire Exec Resigns (Apparently) Over Lubrizol Bid

Some of you may have heard the news that Berkshire Hathaway executive David L. Sokol has resigned. Sokol bought 100,000 shares of Lubrizol and suggested to Buffett that Berkshire buy the whole company. Here’s the Lubrizol-related excerpt from Buffett’s statement about the resignation: Finally, Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts. That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings. Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price. Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire Board of which Dave is not a member. As late as January 24, I sent Dave a short note indicating my skepticism about making an offer for Lubrizol and my preference for another substantial acquisition for which MidAmerican had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in the acquisition of Lubrizol. Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign. Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation. This seems to me a case of an appearance of conflict of...

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A Good Take on Berkshire/Lubrizol
Mar16

A Good Take on Berkshire/Lubrizol

Peter Mycroft Psaras at Mycroft Research posted a great analysis of the Berkshire/Lubrizol deal on Seeking Alpha. He uses Buffett’s favorite measure—owner earnings—to assess the deal. Mycroft points out that Lubrizol stands out as among the best in the chemical industry by that metric.

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Observations About Berkshire/Lubrizol
Mar14

Observations About Berkshire/Lubrizol

Berkshire Hathaway is buying C&EN’s 2009 Company of the Year. C&EN has a Latest News with the main details. Here are a few observations: 1) It doesn’t seem like the most expensive deal in the world. In fact, it seems like Buffett is comfortably in value territory with this one. Berkshire is getting the company for just under 13x earnings, including Lubrizol’s net debt, and less than 9X EBITDA. 2) The value doesn’t seem to imply that there was a bidding war for the company. Perhaps that makes sense. Lubrizol is a great company, but it is mostly in lubricants. That business, wedded largely to the future of the internal combustion engine, might not capture the minds of the large chemical firms that seek to diversify. 3) Word about the impending acquisition seems to have gotten out before the official announcement. 4) Buffett hinted that a big acquisition was in the works a couple of weeks ago with his annual letter to shareholders. In it, he said, “Our elephant gun has been reloaded, and my trigger finger is itchy.” Good metaphor, BTW. Way better than “loaded for quail”, an expression which never really made sense to me. Though, calling Lubrizol an elephant by Berkshire standards is stretching it a bit. It is more like an elk or something. 5) Berkshire helped Dow buy Rohm and Haas. Lubrizol kind of reminds me of Rohm and Haas, even though both companies mostly serve different sectors. Both are specialty firms that have the winds at their backs, perhaps for different reasons. Rohm and Haas was a bit more focused on technology. Lubrizol strength is being well managed. 6) Buffett thinks so, too. “Just keep doing for us what you have done so successfully for your shareholders,” he said to James Hambrick in the release. I’ve got a lump in my throat. Seriously, though, it is quite an endorsement. 7)  Hambrick has his accomplishments. The company came out of the downturn with strong earnings. He oversaw the acquisition and successful integration of Noveon, which helped diversify the company away from lubricants. This in an industry where large acquisitions towards such aims all too often are the parasites that consume the...

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