AUDIENCE MEMBER 00:09
Good afternoon. My name is Fred Strasheim (PH) and I’m from here in Omaha.
I have a question about your acquisition methodology. And I was intrigued to read in your annual report about your acquisition of Star Furniture.
And as I understand the process you followed, Mr. Buffett, you met with Mr. — or you — I’m sorry, you reviewed financials for a brief period, liked what you saw, then you met with Mr. Melvyn Wolff for two hours and struck a deal. And you wrote you had no need to check leases, work out employment contracts, et cetera.
WARREN BUFFETT 00:45
AUDIENCE MEMBER 00:46
I think that most companies, when they do acquisitions, would feel the need to do a significant amount of legal due diligence, to do things like check the leases, check into things like undisclosed environmental liability, or perhaps threatened litigation.
And I guess my question is, have you ever been burned by your approach?
WARREN BUFFETT 01:06
We never been burned by the — we’ve been burned only in the sense that we’ve made mistakes on judging the future economics of the business, which would’ve had nothing to do with due diligence.
We regard what people normally refer to “due diligence” as, as really sort of boilerplate in most cases.
It’s a process that big companies go through. And they feel they have to go through it. And they’re ignoring — oftentimes, in our view — they’re ignoring what really counts, which is evaluating the people they’re getting in with, and evaluating the economics of the business. That’s 99 percent of the deal.
You know, you may run into an environmental liability problem, you know, one time in a hundred, or you may, you know, you may find a bad lease.
I asked Melvin about, you know, “Do you have any bad leases?” I mean, that’s the easiest way to do it. And I could read them all and try and look for every clause or something, but it isn’t going to — you know, that is not the problem.
We’ve made bad — lots of bad deals. We made a bad deal when we bought Hochschild Kohn, for example, the department store operation, back in 1966. But it had — fine people — but we were wrong on the economics of the business.
But the leases didn’t make any difference. You know, that sort of thing just was not important. And I can’t recall any time that what other people refer to as due diligence would’ve avoided a bad deal for us.
CHARLIE MUNGER 02:32
I can’t either.
WARREN BUFFETT 02:33
No. That’s 30-some years. And I —
The key thing — you just don’t want to do — I go — I’m on various public company boards — I’ve been on 19 public company boards — and you know, their idea of the due diligence is to send the lawyers out and have a bunch of investment bankers come in and make presentations and all that.
And I regard that as terribly diversionary, because the board sits there, you know, entranced by all of that, and everybody reporting how wonderful this thing is and how they checked out patents and all that sort of thing. And nobody is focusing really on where the business is going to be in five or 10 years.
You know, business judgment about economics — and people to some extent — but the business economics — that is 99 percent of deal making. And the rest, people may do it for their protection. I think too often they do it as a crutch just to go through with the deal that they want to go through with anyway, and of course all the professionals know that. So believe me, they come back with the diligence, whether due or not. And — (Laughter)
We are not big fans of that. I don’t know how many deals we’ve made over the years, but I cannot think of anything that traditional due diligence has had a thing to do with.
CHARLIE MUNGER 03:48
No, we’ve had surprises on the favorable side a couple of times —
WARREN BUFFETT 03:53
That is true. That is true. The kind of people that we’ve generally dealt with have usually told us the bad things first and good things after we made the deal.
We made a deal with a fellow over in Rockford in 1969, Eugene Abegg, Illinois National Bank and Trust Company. I made that deal in a couple of hours and, I mean, there just wasn’t any way that Gene was going to be hiding anything bad.
For the next ten years when I went over there, every time I’d go to lunch he’d point out some building in town that we owned that wasn’t on the books, or some foundation we had that had money in it he hadn’t told me about.
And he even gave me some bills, one of which I carry in my pocket, that he had still sitting around that were issued by the bank that were our own money which he never told me about. We could cut them out like paper dolls. I mean, Gene was not a guy to show all his cards. (Laughter)
And those are the kind of people we’ve generally dealt with, and I would certainly say that Melvyn and [his sister] Shirley [Toomin] fit that description in spades.
We are now at 3:30pm, it has been a lot of fun this weekend. I'm glad you came and I hope to see you next year, thank you. (Applause)
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