See’s Candy Shops
On 3rd January 1972, Blue Chip Stamps (then an affiliate of Berkshire and later merged into it) bought control of See’s Candy Shops, a West Coast manufacturer and retailer of boxed-chocolates.
The sellers asked $40 million for 100% ownership of the company. But then the company had $10 million of excess cash, so the true offering price was really $30 million.
Back then, Charlie and Warren, were not yet fully appreciative of the value of an economic franchise. They looked at the company’s mere $7 million of tangible net worth and offered a maximum of $25 million for the company.
They were lucky that the seller agreed to it.
See’s candy sales in the same period increased from $29 million to $196 million from 1972 to 1991. The profits grew even faster than sales, from $4.2 million pre-tax in 1972 to $42.4 million in 1991.
In order to evaluate this increase in profits properly, we must look at the incremental capital investment required to produce these additional profits.
In 1991, the company has a net worth of $25 million. This means that only $18 million of earnings had to be reinvested in the company. During the 20 or so years, about $410 million of pre-tax profits were distributed to Blue Chip/Berkshire.
What did Warren see in See’s?
They saw that the business had untapped pricing power.
Add to that Chuck Huggins, a person of utmost capability and integrity, then See’s executive vice-president, whom they instantly put in charge, and they had a winner.