Transcription
We've been burned only in the sense that we made mistakes on judging the future economics of the business, which would have had nothing to do with due diligence. We regard what people normally refer to as due diligence as really sort of boilerplate in most.
It's a process that big companies go through and they feel they have to go through it, and they're ignoring, often times 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% 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, uh, I can read them all and try and look for every clause or something, but it isn't going to, you know, it, that is not the problem.
We've made bad, lots of bad deals. We made a bad deal when we bought Hosel Cone, for example, a department store operation back in 1966, but it had fine people. Uh, but we were wrong on the economics of the business, but the leases didn't make any difference, or, you know, that sort of thing just was not important. And I can't recall any time that that what other people refer to as due diligence would have avoided a bad deal for us.
"I can't either."
"No, that's 30-some years. And I, the, the key thing and you just don't want to do. I, I, I go into, 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. I regard that as 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've 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. And, uh, you know, business judgment about economics and and people, to some extent, but the business economics, that is 99% of deal-making. And, uh, uh, the rest, uh, people may do it for their protection. I think too often they do it as a crutch just to go through with a deal that they want to go through with anyway. And of course, all the professionals know that. So, believe me, they, they come back with the diligence whether due or not. And, uh, uh, we, we are, we are not big fans of that. Uh, uh, we have, I don't know how many deals we've made over the years, but I, I cannot think of anything that traditional due diligence has had a thing to do with. And and..."
"No, we've had surprises and on the favorable side."
"A couple of times."
"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. But, uh, we made a deal with a fellow over in Rockford in 1969, Eugene Abeg, the Illinois National Bank and Trust Company. I made that deal in a couple of hours. And I mean, there was just wasn't any way that Gene was going to be hiding anything bad. For the next 10 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 with the, with the, uh, that were issued by the bank that were our own money, which he never told me about. He had, we could cut them out like paper dolls. I mean, Gene was not a guy to show all his cards. And [clears throat] those are the kind of people we've generally dealt with. And I would certainly say that the, uh, that Melvin and and and Shirley fit that description in spades. We're now at pre-30. I get that question fairly often, sometime often from lawyers, in fact, our own. We talked to Munger, Tolls, the law firm, and that was one of the questions I got, why we didn't do more due diligence, which we would have paid them by the hour for the, uh, [laughter] uh, it's interesting. The, we've made plenty of mistakes in acquisitions, uh, plenty, and we made mistakes in not making acquisitions, but the, the mistakes are always about making an improper assessment of the economic conditions in the future of the industry or the company. They're not a bad lease. They're not a specific labor contract. They're not a questionable patent. They're [clears throat] not the things that are on the checklist, you know, for every acquisition by [clears throat] every major corporation in America. Those are not the things that count. What counts is whether you're wrong about whether you've really got a fix on the basic economics and how the industry is likely to develop, or whether Amazon's likely to kill them, you know, in a few years, or that sort of thing. And I, we have not found a due diligence list that gets at what we think are the real risks when we buy a business. So, like I said, we've made, we [clears throat] certainly made at least, oh, at least a half a dozen mistakes, and probably a lot more if you get into mistakes of omission, but none of those would have been cured by a lot more due diligence. They might have been cured by us being a little smarter. Uh, it isn't, it just isn't the things that are on the checklist that really count. Assessing whether a manager who I'm going to hand a billion dollars to for his business, and he is going to hand me a stock certificate. Assessing whether he's going to behave differently in the future in running that business than he has in the past when he owned it. That's incredibly important. But there's no checklist in the world that's going to answer that, you know. So, uh, if we thought there were items of due diligence, and incidentally, there are a few that that get covered. I mean, you want to make sure that they don't have twice as many shares out as you're buying or something of the sort. But there, if we thought there were things that that we were missing that were of importance in assessing the future economic prospects of the business, uh, you know, we would by all means drill down on those. But the, the question of, you know, when we bought Seas, they probably had 150 leases. Uh, you know, when we, when we buy Precision Castparts, they have 170 plants. You know, there's, there's going to be pollution problems at some place, and it, those are, that is not what determines whether a $32 billion acquisition is going to be look good 5 years from now or 10 years from now. And we try to focus on those things. And I do think it probably facilitates, uh, things with at least certain people, uh, that our method of of of operation does cut down. You get into squabbles on small things. I've seen deals fall apart because people start arguing about some unimportant point, and their egos get involved, and and the, you know, they, they draw lines in the sand and all of that. That I think we gain a lot when we start to make a deal. It usually gets done.
Charlie.
"Well, if you stop to think about it, business quality usually counts on something more than whether you crossed a T in some old lease or something. And the human quality of the management who are going to stay are very important. And how are you going to check that as by due diligence? You know, and I think I don't know anybody who's had a generally better record than Berkshire in judging business quality and the human quality of the people who are going to lead the business after it was acquired. And I don't think it would have improved at all by using some different method. So I think the answer is that for us, at least, we're doing it the way we should. Negotiations that drag out have a tendency, they're more likely to blow up for some reason. I mean, people, they can get, they can get obstinate about very small points, and and it's silly to be obstinate, but people get silly sometimes. So it, I, I, I like to, I like to keep things moving. I like to show a certain amount of trust in the other person because usually trust is comes comes back to you. But the, you know, the truth is, there's some bad apples out there, and spotting them, uh, is not going to come from looking at documents. It's, you really have to size up whether that person who's getting a lot of cash from you is going, how they're going to behave in the future, because we're counting on them. And and that, that assessment is is as important as anything involved. You know, we know all the figures and everything going in, and we know what we'll pay. And so we don't, we don't want things to get gummed up, uh, in negotiations. And I'm perfectly willing to lose small points here and then on a deal if I, if I have the deal on the right terms. I don't believe in in making a, and Tom Murphy will taught me this. I mean, you know, you, you, you just don't try and win every point, but, uh, it's, it's a terrible mistake, but you make a decent deal. And [clears throat] and if you find something that bends a little different some way, that's okay. If, if you think it's bad faith and gives an indication of the character of the person you're dealing with, then you got another problem. And and you're lucky if you find that out early."