Invite ye felawes and frendes desirous in gold to enter the gates of Shrewd'm, for they will thanke ye later.
- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 2
I thought Greg's letter had an interesting point on the Pilot Travel Center acquisition. He said that they made the acquisition and owned the majority of the company but did not have operational control. It's well known that they had issues with the controlling owner, the Haslam family, and did eventually buy the entire company, but litigation was involved. Greg's point was that never again will Berkshire do this.
To me, this reflects a wariness when dealing with future M&A that differs substantially from Warren and Charlie's way of operating.
Does anyone know whether MidAmerican Energy and Marmon Industries (which were both structured similarly to Pilot Travel Centers) involved Berkshire having majority ownership but operating control resting with the minority owner?
No. of Recommendations: 10
I think the key part of the Pilot deal that screwed us was that without operational control we were powerless to stop the cooking of the books. This pushed us into paying more for the remaining portion because we had agreed in advance on the metrics to be used for valuing the remaining portion. So besides tying % of economic ownership to % of operational control, another point would be to reserve the right to determine the value of the remaining unowned portion at the time it’s purchased.
No. of Recommendations: 9
I think the key part of the Pilot deal that screwed us was that without operational control we were powerless to stop the cooking of the books. This pushed us into paying more for the remaining portion because we had agreed in advance on the metrics to be used for valuing the remaining portion. So besides tying % of economic ownership to % of operational control, another point would be to reserve the right to determine the value of the remaining unowned portion at the time it’s purchased.
This is a good point - agreeing to a deal involving metrics that can be gamed will only work out if the people in interim control are not the kind of people who would game the metrics. It is hard for me to fathom why Buffett would have wanted any association with the Haslams from whom he bought this company, given their track record of unsavoury conduct. But given that information (of which Buffett must surely have been aware), agreeing to a 3-stage deal like this one, with the second and third phases dependent on metrics under the control of the Haslams, was a good way of compounding the initial mistake of doing a deal at all.
