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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Lubrizol CEO Admits He Scared ‘The Bejeebers’ Out Of Analysts
Aug03

Lubrizol CEO Admits He Scared ‘The Bejeebers’ Out Of Analysts

And the award for outstanding achievement in the field of leveling with analysts goes to James L. Hambrick, CEO of Lubrizol. During his prepared remarks during Lubrizol's Q2 earnings conference call, he told analysts that he didn’t want to talk about his company’s bidding war with BASF to buy Cognis by, well, saying much more about the failed takeover attempt than any other CEO would spend talking about a failed takeover attempt: “I have nothing I can tell you in terms of portfolio enhancements. We're going to continue to work that space. Some of you may want to talk about the Cognis acquisition, I don't intend to spend any time on that this morning. We were not successful, it was a large deal, I know it scared the bejeebers out of some of you, but it's not very often that you could put together a bolt-on in personal care, in coatings, and in the industrial space. The only thing that was really wrong with it was it all came at us at one time and we weren't successful.” BASF inked a deal in late June buy Cognis for $3.8 billion. There were many leaks about the negotiation process before the deal was announced. Lubrizol supposedly had a bigger offer on the table, but the financing wasn’t as ironclad as BASF’s. As far as the scaring the “bejeebers” out of analysts goes, Lubrizol only has about $4.8 billion in revenues in 2009, making a $4 billion acquisition rather steep. Big acquisitions normally transform companies, but often into debtors-in-possession. However, Lubrizol did rack up $500 million in earnings from those revenues, not a bad record in a recessionary year. And let us not forget that when Lubrizol bought Noveon in 2004, it had about $2 billion in sales while Noveon had about $1.2 billion. Hambrick says Lubrizol isn’t out of the hunt: “We'll move on, we have other assets that we're looking at, other opportunities. I'm working at it full-time even as during the course of this week and will continue to work that. Our first priority is to invest in the business to sustain it and keep it moving. Our second priority really is what I would call the duet of portfolio enhancements and share repurchases. It's the proper use of our cash balance for the benefit of shareholders.” Odds are he won’t find a purchase that will push all of Lubrizol’s buttons like Cognis would...

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