Berkshire's Sokol Took Lead In Lubrizol Deal, Filings Show
March 25 2011 - 8:17PM
Dow Jones News
David Sokol, considered a possible successor to Warren Buffett
at Berkshire Hathaway Inc. (BRKA, BRKB), identified chemicals maker
Lubrizol Corp. (LZ) as a potential acquisition and took the lead in
early negotiations to buy the company, according to a regulatory
filing late Friday that detailed how last week's $9 billion deal
came about.
It was Sokol, a Berkshire executive, who plucked Lubrizol from a
list of 18 chemical companies that bankers at Citigroup Global
Markets had compiled in December 2010 as possible acquisitions at
Sokol's request, according to the filing.
Sokol, chairman of Berkshire subsidiary MidAmerican Energy
Holdings Inc. and chief of unit NetJets Inc., met with Lubrizol
Chief Executive James Hambrick in January to discuss the corporate
culture at the two companies, and told him a Berkshire takeover
offer would be contingent on Hambrick's agreeing to stay on as
CEO.
It was after Hambrick and his board of directors had agreed to
move forward with takeover talks that Buffett, Berkshire's chairman
and chief executive, took the lead, the filing says. Those talks
culminated in the announcement March 14 of Berkshire's plan to
acquire Lubrizol for $9 billion in cash.
Sokol's early involvement in the deal is further evidence that
he has become an important lieutenant for Buffett in recent years,
and may give more ammunition to followers of Berkshire who consider
him the frontrunner to eventually replace Buffett as Berkshire's
CEO. Buffett had already tapped Sokol to turn around Berkshire's
fractional-jet business, NetJets, and sent him to China to meet
with executives at battery-maker BYD before investing in that
company.
Back in 2008, Sokol also identified and helped negotiate another
major deal for Berkshire: the takeover of Baltimore utility
Constellation Energy Group Inc. (CEG). The merger ultimately fell
apart, but Berkshire walked away with more than $900 million in
investment gains from buying preferred shares in the company and a
$175 million break-up fee from the scuttled deal.
The filing said that Sokol meets regularly with a variety of
investment banking firms, including Citigroup, "to discuss
capital-raising and transaction ideas." Late last year, Sokol asked
Citigroup for "more information regarding possible transactions in
several industries, including the chemical industry," the filing
said.
The regulatory document, a preliminary proxy statement for
Lubrizol shareholders who must vote to approve the deal, showed
that Buffett took a firm line with Lubrizol's board once he had
given them his offer to buy the company for $135 a share in
February.
In early March, Lubrizol's board of directors indicated through
their financial adviser, Evercore Partners, that they wanted
Berkshire to pay $140 per share. Buffett didn't budge on his
$135-per-share offer, which reflected an 18% premium to the stock's
all-time high price.
Evercore warned Lubrizol that Berkshire might withdraw its offer
if the company sought out other potential buyers for a higher bid,
and indicated it was unlikely others would pay more for the
business.
Buffett has famously said that he doesn't participate in
auctions when negotiating to buy a company. Lubrizol's financial
advisers warned the board about Buffett's dislike of competing
bidders at more than one meeting, according to the proxy.
Berkshire's legal team later stood firm on the size of a
break-up fee that Berkshire would earn if Lubrizol later accepted a
higher offer. Despite efforts by the Lubrizol team to push
Berkshire's negotiators to lower their demand for a $200 million
fee, the fee never changed. Berkshire also rejected a so-called
"go-shop" period that would have given Lubrizol 60 days to try to
find a better offer.
All the while, the Lubrizol board was weighing the takeover
against an earlier plan it had developed to make a takeover offer
of its own. The target isn't named in the proxy.
Berkshire's acquisition of Lubrizol is expected to close in the
third quarter and requires approval from shareholders of the
chemicals company. Lubrizol is aiming to earn $13.50 per share in
2012, versus earnings of $10.64 per share in 2010.
Shares of Lubrizol closed Friday up 5 cents to $133.75.
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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