-------------------------------------------------------------------- Period 3Wesco Financial. It was a Savings and Loan company that went public in 1950s. By 1970s its was in tough waters. Buffett had studied the company really well. He was following it since early sixties. By 1972 Wesco was in low teens, half its book value. Blue Chip stamps snapped up 8% of the stock for $2million investment. As Wesco was temporarily in bad shape, it was planning to merge with another Financial company named Financial corp of Santa Barbara. Buffett and Munger instantly knew that Wesco was selling itself for a deep discount because its shares were undervalued as compared to the other company whose stock was overvalued. Blue Chip increased its stake in the company to 20% so that it could influence the directors against the merger. After failing to persuade Wesco's President Vincenti to vote against the merger, Buffett approached Elizabeth Peters, a major shareholder of the company. She was somewhat interested in overhauling the company. Elizabeth was mesmerized by Buffett's capitalist credo and supported his stance of going against the merger. With the help of Elizabeth's support Berkshire was able to avert the merger and save Wesco for being sold for a discount. Blue Chip initially raised its stake in Wesco to 24.9%. But Wesco's shares kept falling and Berkshire kept raising its stake and eventually by 1974 was a majority shareholder in the company. SEC investigation. SEC began inquiry in this deal and was investigating if Buffett and Munger had manipulated Wesco's stock price so that they could get a major holding in the company. Buffett was outright honest about his explanations. SEC's lawyers could also get a sense of Buffett's capitalist credo and were leaning towards the opinion that he was not the man in pursuit for a fast buck. But SEC could not overlook the mirage of artifacts that were entangled and confusing. It arose because of Buffett's parallel interests in Berkshire, Blue chip and Diversified retailing. In 1976 the case was settled. SEC formally charged Blue Chip of manipulating the stock price of Wesco. Blue chip neither agreed nor denied this and settled for $115,000. Blue Chip that time owned 80% of Wesco. Blue Chip was later merged with Berkshire in 1983 and Diversified retailing in 1978. The merger also formalized Buffett's relationship with Munger. Munger exchanged his holdings in Diversified retailing and Blue Chip for a 2% stake in Berkshire's stocks. He was named Vice Chairman of Berkshire and also oversaw Wesco Financials operations as its Chairman. Berkshire recovered from its woes of mid-seventies. Its stock was at a high of $95 by 1976. Berkshire's progress 1977-1982. Textiles continued its slide and overall the company neither made any profit nor made any loss. Insurance Underwriting was OK, but in 1982 it dealt a huge loss of $11.34million. Insurance as a whole was playing as per Buffett's plan. Out of the total operating income of $201million generated between 1977 and 1982. The income from insurance investment was $141million. This includes all the dividends and interests from the company's equity and Fixed income. The total FLOAT had increased from $139million in 1977 to $220million in 1982. Plus the realized income generated from the sale of securities was around $71million. Thus of the total pretax income (including capital gains) of $274million around $212million was either through insurance investment income or through sale of securities. Thus around 77% of the company's total income was generated from Buffett's desk. But Buffett was keen on adding businesses that had huge moat and were having great FREE cash Flow. With acquisitions of See's Candies, Illinois National Bank and Buffalo News. He had developed a good record of roping in businesses of diverse sectors.
Berkshire's investment in Buffalo news. It was founded by the Butler
family in 1880. The paper had thrived for nearly a century. With the death of
Kate Robinson in 1974, the paper company was up for sale by her estate. The
paper was printed in evening and was preferred by readers of Buffalo who liked
there news delivered to them after their work. The newspaper had a very strong
Union. This crippled management's negotiating power and became a negative point
for potential buyers. Vince Manno, a newspaper broker was structuring the deal
on behalf of Buffalo News. After being turned down by Washington Post Co and
Chicago Tribune, he reduced the asking price from $40million to $35million.
Buffett liked the company but thought the price was too high. He offered
$30million, finally the deal was settled at $32.5million. Buffalo News didn't
have a Sunday edition because of a deal between its former owners Butler family
and the Conner family that owned Courier Express.
Buffett knew that the Sunday edition was crucial for Buffalo News' survival. So
he went about spearheading a plan to launch the Sunday edition for the paper.
Courier Express slapped the company with a suit stating that Buffalo News was
violating Sherman Antitrust act. The issue became a hot topic in Buffalo and
finally the fight became a personal one for Buffett. He desperately wanted
Buffalo News to succeed.
Berkshire's court case with Buffalo News. It was a cold and wet day in
Buffalo where the courthouse was packed and the folks of the town had come to
witness one of the most critical litigation affecting their lives. Buffett was
grilled by the opposition lawyers. He was honest and straight forward in his
replies. He simply explained his playbook of investing in businesses by solely
looking at its fundamentals. He also emphasized as to how Sunday edition for
Buffalo News would benefit the people of Buffalo.
But Buffett committed a serious mistake when he expressed his opinion in a Wall
Street Journal article about the economic value of a monopolistic businesses. He
used the term "Toll Bridge" to compare such monopolistic business. This was
enough for the attorneys to project Buffett as a shrewd businessman who was just
thinking about his profits in the pretext of community's interests. On
Nov-9,1977, just four days before the inaugural Sunday edition of his newspaper,
judge ordered an injunction against the Evening news and slated the whole issue
for a trial. The injunction did permit the publication of Sunday edition, but
had loaded it with lots of conditions. More than the injunction, it was the bad
publicity that hurt the business. This created an uphill task for marketing
department to sell its advertising space.
By 1977 Berkshire's share price was at $132. Making Buffett's net worth as
$70million. Berkshire thru blue chip had invested $32.5 million in Buffalo News.
By far Berkshire's largest investment. Berkshire's future was very much
dependent on how Buffalo News would perform in near future. In response to
Buffalo News?efforts, Courier express responded by upgrading its technology and
giving its content a fresh look. Unlike his other investments, Buffett took
personal interest in operations of Buffalo News. He showed up in company events
and advised on some articles that he felt would be interesting to the readers.
But despite all these efforts, Buffalo news was a sinking ship. In 1978 the
company made a loss of $2.9million. There was some positive news in 1979 when
U.S. Court of appeals on New York overruled the previous injunction. But this
was not enough for the company for yet another yearly loss of $4.6 million. In
1980, Stan Lepsey, a veteran from Newspaper business was pulled in to run the
operations. But he was faced with new set of problems in the form of Union
negotiations. By 1982 Buffalo News had made a cumulative loss of $12million
since Berkshire had bought it in 1977.
Buffalo News turn around. Munger informally declared the cumulative loss as a permanent capital loss and repented on their decision of investing in that business. But Buffett had still kept hope in the company. In early 1982 Courier Express also started having problems. Unlike Buffalo News it did not have any backing of a strong company. It could not weather the storm and had to wind down its operations in Sep-1982. This became the turning point in Buffalo News' fortune. All of a sudden it was the only major newspaper of Buffalo and thereby its readership soared. It soon started a morning edition. Its Sunday subscription topped 360,000. In the coming 5 years the company earned over $150million.
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