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When the creator of the specialist boots and shoes company H. H. Brown died in December 1990 aged 92 his family concluded that it was best if the company were sold. Frank Rooney, CEO and son-in-law, took up the task of finding a buyer with the help of Goldman Sachs and their pack of material to give to potential buyers.
But real progress began on the golf course. A long-time friend of Buffett, John Loomis, was out on the links in Florida in Spring 1991 playing against Frank Rooney. The conversation turned to the sale of H. H. Brown. Immediately Loomis thought the company a good fit for Berkshire Hathaway, “John told Frank that the company should be right up Berkshire’s alley, and Frank promptly gave me a call”, Buffett recounts in his 1991 letter.
The conversation went well. According to Rooney, “Warren said ‘Well, that sounds interesting. Don’t send me any of that stuff from Goldman Sachs, just send me the audited numbers for the last couple of years.’” (Frank Rooney interviewed by Robert P. Miles for “The Warren Buffett CEO; Secrets from the Berkshire Hathaway Managers”). Buffett came away from the call thinking “that they would make a deal”.
Rooney sent the accounts and they agreed to meet in New York. At lunch, Buffett asked Rooney and his brother-in-law whether, if Berkshire agreed to their asking price, they would stop talking to other potential buyers. “I said ‘Yes’ and he said, ‘Okay, we got a deal.’ So my brother-in-law and I took a walk around the block and came back and said, ‘Okay, that’s it.’” (Book: The Warren Buffett CEO)
Rooney was astonished that Buffett had agreed without having yet seen a factory or met any of the H. H. Brown people. “Why the hell did he buy a shoe company? I asked him later, and he said…‘because of you’”. Berkshire paid $161m cash for 100% of H. H. Brown shares July 1, 1991.
Why buy?
Apart from the proven earnings (around $25m before tax, $15m after tax) there were three key reasons why Buffett wanted H. H. Brown, each linked directly to the likelihood of the profits continuing to rise:
- Frank Rooney was prepared to continue running the show, “Much of my enthusiasm for this purchase came from Frank’s willingness to continue as CEO. Like most of our managers, he has no financial need to work but does so because he loves the game and likes to excel. Managers of this stripe cannot be “hired” in the normal sense of the word. What we must do is provide a concert hall in which business artists of this class will wish to perform.” (1991 Letter)
- It had an excellent managerial team. “Shoes are a tough business – of the billion pairs purchased in the United States each year, about 85% are imported – and most manufacturers in the industry do poorly. The wide range of styles and sizes that producers offer causes inventories to be heavy; substantial capital is also tied up in receivables. In this kind of environment, only outstanding managers like Frank and the group developed by Mr. Heffernan can prosper.” (1991 Letter)
- A brilliant way of compensating managers. Only a small proportion of overall pay was fixed, most of a managers’ income depended on achieving good company profits relative to capital devoted to making those profits. “A distinguishing characteristic of H. H. Brown is one of the most unusual compensation systems I’ve encountered – but one that wa………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
