Berkshire Letter by Warren Buffett – 1993 (Part 2)
Feb 7th, 2007 by Martin Lee
Purchase of Dexter Shoe
In 1991, Berkshire purchased H. H. Brown, a manufacturer of work shoe, boots and other footwear. At the end of 1992, they purchased Lowell Show, a long-established manufacturer of women’s and nurses’ shoes. This time in 1993, they acquired Dexter Shoe, which manufactures popular-priced men’s and women’s shoes.
Five years prior to these purchases, Warren Buffett had no thoughts that he would be getting the shoe business. That’s the way it works at Berkshire. They have no strategic plans about what businesses or industries they will enter in the future. Instead, they focus on the economic characteristics of businesses that they would like to own AND the personal characteristics of the managers running these businesses.
In fact, Warren Buffett feels that when a corporate giant embarks on new ventures because of some grand vision, it usually doesn’t work out too well for the shareholders.
For the case of Dexter Shoe, the owners Harold and Peter, was paid using Berkshire shares. So what they did was they traded 100% interest in a single terrific business for a smaller interest in a large group of terrific businesses. According to Warren, this was good for them (Harold and Peter) for various reasons:
1) They incurred no tax on this exchange.
2) They now own a security that can be easily used for charity, personal gifts or converted to cash. Compare this to complications that often arise when assets are concentrated in a private business and owners want to divest part of this asset.
3) Private companies often find it difficult to diversify outside their industries. By shifting their ownership to Berkshire, they solved a reinvestment problem.
4) Their investment results from owning shares of Berkshire will parallel exactly that of Warren, as the company does not issue him any restricted shares or stock options.
5) They still get to run Dextor Shoe as they did (and treated as partners) even though they only own non-controlling shares in Berkshire.
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