No. of Recommendations: 26
Did somebody say Dairy Queen? I have a soft spot for Dairy Queen as that was one of my tickets into becoming a Berkshire Hathaway shareholder. The first ticket was FlightSafety, when Buffett acquired that company one year earlier, and I exchanged my shares of FlightSafety for Berkshire shares.
Back in December 1997, I wrote a blurb: Why Warren Buffett is Scooping Up International Dairy Queen:
Warren Buffett's fondness for sweets is evident by his daily Cherry Coke cravings and through his investments in Coca-Cola and See's Candies. Tootsie Roll and International Dairy Queen might also satisfy Buffett's sweet investment tooth. Both companies boast profitable operations, strong financial positions and consistent long-term growth records. Best of all, Tootsie Roll and Dairy Queen currently sell at tempting valuation levels. Management owns significant amounts of the voting shares at each firm. Dairy Queen's return on shareholders' equity has exceeded 20% over the last 10 years. With substantial cash flows, Dairy Queen consistently buys back shares-a trait Mr. Buffett views positively.
Indeed, the Oracle of Omaha operating Berkshire Hathaway did view International Dairy Queen positively! This past October, Berkshire Hathaway announced plans to acquire International Dairy Queen in a $585 million deal. Warren Buffett noted, "Dairy Queen is a business that I like run by an outstanding management team." John Mooty, the chairman of Dairy Queen and a principal shareholder, responded, "Our family will vote our entire 35% of the voting shares of Dairy Queen in favor of the merger and will elect to receive Berkshire common stock for all the Dairy Queen shares owned by us."
Shareholders may elect to receive either $27 in cash or $26 in class A or class B Berkshire shares for each share of Dairy Queen. I plan to exchange all my Dairy Queen shares for Berkshire Class B stock. I'll thus retain my interest in International Dairy Queen and at the same time benefit further from Mr. Buffett's renowned investment expertise by adding to my existing Berkshire Hathaway holdings.
Out of thousands of companies, why is Buffett scooping up International Dairy Queen? After a director and significant shareholder died, Dairy Queen approached Berkshire Hathaway about buying part of the estate's shares. I'm sure it didn't take Mr. Buffett long to agree to buy the whole company instead. The simple reason is that Dairy Queen perfectly met Berkshire Hathaway's acquisition criteria:
(1) Large purchases (at least $25 million of before tax-earnings),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround situations,"
(3) Businesses earning good returns 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, we won't understand it),
(6) An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
With 24 consecutive years of record earnings, minimal debt and earning returns on equity over 20%, Dairy Queen easily met all the criteria on the checklist. Not surprisingly, Buffett scooped up the company at a reasonable price. Just as in the case of FlightSafety, Wall Street is grumbling that Buffett is getting a bargain. Of course, that is Buffett's trademark! Instead of grumbling, shareholders should welcome the opportunity to exchange their Dairy Queen shares for Berkshire Hathaway shares and hope Warren Buffett continues to identify such sweet bargains in the future.
Warren Buffett's investment success is legendary. Part of this success comes from identifying outstanding companies using his relatively commonsense acquisition criteria outlined above. Long-term investors would be wise to adopt Buffett's acquisition criteria as part of their investment criteria. By carefully investing in reasonably-valued companies with consistent earnings power, little debt and good returns on equity, you, too, should enjoy profitable investment returns. Even if Buffett doesn't come along and scoop up firms like FlightSafety and Dairy Queen from your portfolio, you will comfortably know that you are following a multibillionaire's recipe for investment success!
