Today, corporate instability is an inevitable consequenceof widely-diffused ownership of voting stock. Atany time a major holder can surface, usually mouthing reassuringrhetoric but frequently harboring uncivilintentions. By circumscribing our blocks of stockas we often do, we intend to promote stability where it otherwisemight be lacking. That kind of certainty,combined with a good manager and a good business, providesexcellent soil for a rich financial harvest. That』s the economic case for our arrangements.
The human side is just asimportant. We don』t want managers we like and admire - and who havewelcomed a major financial commitment by us - to ever lose anysleep wondering whether surprises might occur because of our largeownership. I have told them there will be nosurprises, and these agreements put Berkshire』s signature where my mouth is. That signature also means the managers have a corporate commitmentand therefore need not worry if my personal participation inBerkshire』s affairs ends prematurely (a term I define as anyage short of three digits).
Our Cap Cities purchase wasmade at a full price, reflecting the very considerable enthusiasmfor both media stocks and media properties that has developed inrecent years (and that, in the case of some property purchases, hasapproached a mania). It』s no field for bargains. However,our Cap Cities investment allies us with an exceptional combinationof properties and people - and we like the opportunity toparticipate in size.
Of course, some of you probablywonder why we are now buying Cap Cities at $172.50 per share giventhat your Chairman, in a characteristic burst of brilliance, soldBerkshire』s holdings in the same company at $43 per share in1978-80. Anticipating your question, I spent muchof 1985 working on a snappy answer that would reconcile these acts.A little more time, please.
Right after yearend we acquiredThe Scott &Fetzer Company(「ScottFetzer」) of Cleveland for about $320 million. (Inaddition, about $90 million of pre-existing Scott Fetzer debtremains in place.) In the next section of this report I describethe sort of businesses that we wish to buy forBerkshire. Scott Fetzer is a prototype -understandable, large, well-managed, a goodearner.
Thecompany has sales of about $700 million derived from 17 businesses,many leaders in their fields. Return on invested capital is good to excellent for mostof thesebusinesses. Some well-known products are Kirby home-care systems CampbellHausfeld air compressors, and Wayne burners and waterpumps.
World Book, Inc. - accountingfor about 40% of Scott Fetter』s sales and a bit more of its income - is by far thecompany』s largest operation. It also is byfar the leader in its industry, selling more than twice as manyencyclopedia sets annually as its nearestcompetitor. In fact, it sells more sets in theU.S. than its four biggest competitors combined.
Charlie and I have a particularinterest in the World Book operation because we regard itsencyclopedia as something special. I』ve been a fan (and user) for 25 years, and now havegrandchildren consulting the sets just as my childrendid. World Book is regularly rated the mostuseful encyclopedia by teachers, librarians and consumer buyingguides. Yet it sells for less than any of itsmajor competitors. Child craft, another World Book, Inc. product,offers similar value. This combination ofexceptional products and modest prices at World Book, Inc. helpedmake us willing to pay the price demanded for Scott Fetzer, despitedeclining results for many companies in the direct-sellingindustry.
An equal attraction at ScottFetzer is Ralph Schey, its CEO for nine years. When Ralph took charge, the company had 31 businesses, the resultof an acquisition spree in the 1960s. He disposed of many that did not fit or hadlimited profit potential, but his focus on rationalizing theoriginal potpourri was not so intense that he passed by World Bookwhen it became available for purchase in 1978. Ralph』s operating and capital-allocation record is superb,and we are delighted to be associated with him.
Thehistory of the Scott Fetzer acquisition is interesting, marked bysome zigs and zags before we became involved. The company had been an announced candidate for purchase sinceearly 1984. A major investment banking firm spent many months canvassing scoresof prospects, evoking interest from several. Finally, in mid-1985 a plan of sale, featuring heavy participationby an ESOP (Employee Stock Ownership Plan), was approved byshareholders. However, as difficulty in closing followed, the plan wasscuttled.
I hadfollowed this corporate odyssey through thenewspapers. On October 10, well after the ESOPdeal had fallen through, I wrote a short letter to Ralph, whom Idid not know. I said we admired thecompany』s record and asked if he might like totalk. Charlie and I met Ralph for dinner inChicago on October 22 and signed an acquisition contract thefollowing week.
TheScott Fetzer purchase illustrates our somewhat haphazard approachto acquisitions. We have no master strategy, no corporate planners delivering usinsights about socioeconomic trends, and no staff to investigate amultitude of ideas presented by promoters andintermediaries. Instead, we simply hope that something sensible comes along - and,when it does, we act.
To give fate a helping hand, we again repeat ourregular 「business wanted」 ad. The only change from lastyear』s copy is in (1): because we continue to want anyacquisition we make to have a measurable impact onBerkshire』s financial results, we have raised our minimumprofit requirement.
(1) largepurchases (at least $10 million of after-tax earnings),
(2) demonstrated consistentearning power (future projections are of little interest to us, norare「turn-around」 situations),
(3) businesses earning goodreturns on equity while employing little or no debt,
(4)management in place (we can』t supply it),
(5)simple businesses (if there』s lots of technology, wewon』t understand it),
(6) anoffering price (we don』t want to waste our time or that of the seller bytalking, even preliminarily, about a transaction when price isunknown).
We will not engage in unfriendlytakeovers. We can promise completeconfidentiality and a very fast answer - customarily within fiveminutes - as to whether we』re interested. We prefer to buyfor cash, but will consider issuance of stock when we receive asmuch in intrinsic business value as we give. Indeed, following recent advances in the price of Berkshire stock,transactions involving stock issuance may be quitefeasible. We invite potential sellers to check usout by contacting people with whom we have done business in thepast. For the right business - and the rightpeople - we can provide a good home.
On the other hand, we frequentlyget approached about acquisitions that don』t come close to meeting our tests: new ventures,turnarounds, auction-like sales, and the ever-popular (amongbrokers) 「I』m-sure-something-will-work-out-if-you-people--get-to-know-each-other」. None of these attracts us inthe least.
Besidesbeing interested in the purchases of entire businesses as describedabove, we are also interested in the negotiated purchase of large,but not controlling, blocks of stock, as in our Cap Citiespurchase. Such purchases appeal to us only when we are very comfortable withboth the economics of the business and the ability and integrity ofthe people running the operation. We prefer large transactions: in the unusual case we might dosomething as small as $50 million (or even smaller), but ourpreference is for commitments many times that size.
About 96.8% of all eligibleshares participated in Berkshire』s 1985 shareholder-designated contributionsprogram. Total contributions made through theprogram were $4 million, and 1,724 charities wererecipients. We conducted a plebiscite last yearin order to get your views about this program, as well as about ourdividend policy. (Recognizing thatit』s possible to influence the answers to a question bythe framing of it, we attempted to make the wording of ours asneutral as possible.) We present the ballot and the results in theAppendix on page 69. I think it』s fair to summarize your response as highlysupportive of present policies and your group preference - allowingfor the tendency of people to vote for the status quo - to be forincreasing the annual charitable commitment as our asset valuesbuild.
We urge new shareholders to readthe description of our shareholder-designated contributions programthat appears on pages 66 and 67. If you wish toparticipate in future programs, we strongly urge that youimmediately make sure that your shares are registered in the nameof the actual owner, not in 「street」 name or nominee name. Shares notso registered on September 30, 1986 will be ineligible for the 1986program.
Five years ago we were requiredby the Bank Holding Company Act of 1969 to dispose of our holdingsin The Illinois National Bank and Trust Company of Rockford,Illinois. Our method of doing so was unusual: weannounced an exchange ratio between stock of Rockford Bancorp Inc.(the Illinois National』s holding company) and stock of Berkshire, and thenlet each of our shareholders - except me - make the decision as towhether to exchange all, part, or none of his Berkshire shares forRockford shares. I took the Rockford stock thatwas left over and thus my own holding in Rockford was determined byyour decisions. At the time I said,「This technique embodies the world』s oldest and most elementary system of fairlydividing an object. Just as when you were a childand one person cut the cake and the other got first choice, I havetried to cut the company fairly, but you get first choice as towhich piece you want」.
Last fall Illinois National wassold. When Rockford』s liquidation is completed, its shareholders willhave received per-share proceeds about equal toBerkshire』s per-share intrinsic value at the time of thebank』s sale. I』m pleased that this five-year result indicates thatthe division of the cake was reasonably equitable.
Last year I put in a plug forour annual meeting, and you took me up on theinvitation. Over 250 of our more than 3,000registered shareholders showed up. Thoseattending behaved just as those present in previous years, askingthe sort of questions you would expect from intelligent andinterested owners. You can attend a great many annual meetingswithout running into a crowd like ours. (LesterMaddox, when Governor of Georgia , was criticized regarding thestate』s abysmal prison system. 「The solution」, he said, is simple. All we need is abetter class of prisoners.」 Upgrading annual meetings works the sameway.)
I hope you come to thisyear』s meeting, which will be held on May 20 inOmaha. There will be only one change: after 48years of allegiance to another soft drink, your Chairman, in anunprecedented display of behavioral flexibility, has converted tothe new Cherry Coke. Henceforth, it will be theOfficial Drink of the Berkshire Hathaway Annual Meeting.
「1979年8月，《商業週刊》發表了一篇題為《股票死了》(The Death ofEquities)的封面文章。那時，年輕的投資者對股票的興趣蕩然無存：「只有那些不懂得國家金融市場的變化或者沒有能力調整自己的上了年紀的投資者才固守股票。1970-1975年，60歲以下購買股票的投資者的數量下降了大約25%；與此同時，65歲以上購買股票的投資者的數量增長了30%以上。」他們只是不懂得市場。一個「新的金融時代」開始了，「老規則不再適用」了。「美國應該把股票之死看做是一個幾乎永久性的條件。即使經濟氣候可能再一次使之適合於股票投資，」文章認為，「即使它會發動另一場大規模的促銷活動，以便讓人民重新回到股市……如今投資機會的範圍已經遠比20世紀50年代更加廣泛，以至於不太可能重複20年前的經驗了……」文章最後這樣結束它的故事：「一個年輕的美國高管」問，「『你們最近是否見過美國股東的集會？』他們全都是老頑固。」1980年的股市似乎讓人看到了一絲光亮。那一年道指回升到950點。不過在緊接的1980-1981年又出現了27%的暴跌，大多數人都逃離了市場。到1982年，失業率依然居高不下，公司利潤很不理想，通貨膨脹節節攀升。標準普爾無人問津。通用電氣以10倍市盈率交易；寶潔以8倍市盈率交易；高露潔的市盈率是7倍，汽車股的交易價格全都比20年前低。