The Digest #112

Buffett's a Tough Negotiator, Munger Halves Alibaba Stake, Mini-Berkshires, Heresy, Automats, Shrinkflation, Railroads, Ethereum

“If you can’t prove what you want to prove, demonstrate something else and pretend that they are the same thing. In the daze that follows the collision of statistics with the human mind, hardly anybody will notice the difference. The semi-attached figure is a device guaranteed to stand you in good stead. It always has.”

— Darrell Huff, author of How to Lie With Statistics

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New Articles

Last week, I introduced a paid subscription tier for The Rational Walk. Here is a brief summary of the content to expect in the future:

• Weekly Digest. In addition to curated lists of articles and podcasts, there will be occasional brief commentaries as well. Weekly Digest is free for all readers.

• Articles will be published several times per month. Most articles will be about investment principles, personal finance, book reviews, and other topics that I find interesting. Most articles will be initially restricted to paid subscribers.

Auto Insurance Competitive Dynamics, April 6, 2022. The automobile insurance industry is highly competitive and has been consolidating in recent years. GEICO and Progressive are in a race to displace State Farm as the largest company in the industry. This article takes a look at how the competition has unfolded over the past decade and how the race to first place might play out over the next five to ten years.

Business Lessons from Tom Murphy, April 8, 2022. Warren Buffett credits Tom Murphy for teaching him more about how to run a business than any other person. Mr. Murphy’s story is not widely discussed today, probably because the sale of Cap Cities/ABC to Disney took place so long ago. This article looks at Mr. Murphy’s overall career as well as his interactions with Mr. Buffett and Berkshire Hathaway.

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Buffett is Still a Tough Negotiator

Warren Buffett’s negotiating style hasn’t changed very much over the years. After making an offer for an acquisition, it is very rare for Mr. Buffett to agree to sweetened terms. Although this approach has no doubt cost Berkshire some deals, the reputational advantage of being known as a tough negotiator has been priceless.

Based on a recent SEC filing, it appears that Alleghany’s management team was unable to obtain richer terms when they negotiated to sell the company to Berkshire. For background on the acquisition, please read What Does Buffett See in Alleghany which I posted on March 21, the day the deal was announced.

Here are some brief highlights from the SEC filing.

• On February 25, Mr. Buffett received Alleghany’s latest annual report and letter to shareholders which was sent to him by Joe Brandon, Alleghany’s CEO. Mr. Buffett responded to Mr. Brandon by suggesting they meet for dinner.

• On March 7, Mr. Buffett and Mr. Brandon met for dinner in New York City. Mr. Buffett offered to acquire Alleghany for $850 per share in cash, less any fee that Alleghany would pay to a financial advisor. The transaction would not be contingent on any due diligence, financing, or geopolitical risks. Mr. Buffett agreed to a “go shop” period during which Alleghany could solicit other offers.

• On March 12, Mr. Buffett met Mr. Brandon and Jefferson Kirby, Alleghany’s Chairman, in Omaha. Due to potential conflicts of interest regarding Mr. Brandon’s past association with Mr. Buffett and Berkshire Hathaway as CEO of General Re, Mr. Kirby met with Mr. Buffett alone to continue negotiations. Mr. Buffett was unwilling to increase the $850 offer, eliminate the deduction for Alleghany’s use of a financial advisor, or substitute Berkshire stock for cash as consideration for the acquisition.

• There were subsequent negotiations regarding the length of the “go-shop” period which was ultimately set to 25 days. The filing includes interesting information regarding how Alleghany’s board considered the lack of a termination fee an important element favoring accepting the terms of Berkshire’s proposal.

Goldman Sachs contacted twenty-three strategic bidders and eight “financial sponsor” bidders during the 25-day go shop period which will end on Thursday. However, it is interesting to note that there is no termination fee even after the go-shop period up to the date stockholders approve the sale of the company:

Willkie noted that Berkshire did not propose that the Company pay a termination fee if the Company were to terminate the merger agreement in order to accept a superior proposal from another acquiror, whether the superior proposal came during the “go-shop” period or thereafter during the “no-shop” period up until the actual date of the special meeting of stockholders to approve the sale of the Company.

This is a long filing and I have not reviewed the entire document. However, the section documenting how the negotiations played out is relatively brief and might be interesting for readers interested in knowing more. “Background of the Merger” starts on page 22 and is just a few pages long.

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Articles

Munger Halves Stake in Alibaba by Jonathan Stempel, April 11, 2022. Three months ago, I wrote about Charlie Munger doubling down on Daily Journal’s Alibaba position. That decision has now been reversed based on the company’s latest 13-F filing. Alibaba has traded sharply lower in 2022. It is certain that Mr. Munger will be asked about Alibaba at the Berkshire Hathaway annual meeting on April 30. (Reuters)

Noise: A Flaw in Human Judgment — A Review by Rob Henderson, April 5, 2022. “In Noise, Kahneman and his colleagues report findings indicating that, in tasks involving estimation, such as the number of crimes in a city or geographic distances, crowds are wise as long as they registered their views independently. But if people learn what others estimated, then crowds do worse than individuals. The book states that, “while multiple independent opinions, properly aggregated, can be strikingly accurate, even a little social influence can produce a kind of herding that undermines the wisdom of the crowds.” (Quillette)

How will Elon change Twitter? by Trung T. Phan, April 9, 2022. This article isn’t the most current on the ongoing Elon/Twitter drama, but the author makes an important observation: “On the SEC front, Elon is in hot water over his filings. By sending the forms in late, he may have “saved himself about $140 million” by buying at an average price of $39 during the days that his disclosure should have already been made (remember, the stock shot up to ~$50 when he officially announced). Matt Levine — who has been the go-to source covering this story — says it’s unlikely the SEC can clawback that amount; rather, Elon will likely be hit with a “hundreds of thousands of dollar” fine. (trungtphan.com)

Heresy by Paul Graham, April 2022. “Back in the day (and still, in some places) the punishment for heresy was death. You could have led a life of exemplary goodness, but if you publicly doubted, say, the divinity of Christ, you were going to burn. Nowadays, in civilized countries, heretics only get fired in the metaphorical sense, by losing their jobs. But the structure of the situation is the same: the heresy outweighs everything else. You could have spent the last ten years saving children's lives, but if you express certain opinions, you're automatically fired.” (PaulGraham.com)

Warren Buffett’s Protégé Is Building a Mini Berkshire by Chip Cutter, April 9, 2022. “Berkshire is very successful, so being similar to Berkshire is a good thing by and large, in my mind. I’d say we differ on two dimensions. The biggest is size. We can focus on much smaller businesses that are just too small for Berkshire. That’s where I think the biggest opportunity is and why ultimately I left to start Kanbrick. The second differentiator is we’re more hands on. Berkshire famously is very hands off.” Related: Kanbrick annual letters. (WSJ)

Futuristic ‘automat’ dining thrived a century ago. Can covid revive it? by Jane L. Levere, April 8, 2022. As technology advances, more tasks that used to be performed by human beings can be effectively replaced with machines. We’ve all seen the automated kiosks at fast food locations and the self-checkouts at grocery stores. What’s interesting is that automation is nothing new. Since I’ve never seen one of the old automats that were popular a century ago, I found the photos and description of these restaurants very interesting. I suspect we will see more modern versions of automats, especially if labor costs continue to rise. (MSN)

Shoppers Face ‘Shrinkflation’ at the Supermarket by Donna Fuscaldo, April 1, 2022. Food prices have been skyrocketing lately. Today’s March CPI report indicates that “food at home” rose 1.5% in March and 10% over the past twelve months, a pace faster than the overall annual inflation figure of 8.5%. Rather than explicitly raising prices, some manufacturers have indulged in the age-old practice of shrinking packaging in ways that are not immediately obvious to the consumer. Every business has to deal with inflationary pressures as best as they can. Shrinking package sizes might work, but this tactic relies on the hope that customers will not discover the ploy. (AARP)

The First American Railroad, April 11, 2022. The story of technology has always been the story of disruption: “Canals were relatively straightforward feat of engineering and had been made since antiquity. Railroads, however, were entirely new, a pure manifestation of human ingenuity and creativity. In the words of Thomas Gray, one of the earliest apostles of building the lines that would crisscross England, railroads ‘would revolutionize the whole face of the material works and society.’ Canals and rails epitomized the era’s heady fervor that the peoples of Europe and North America were on the verge of something great, of technological and industrial revolutions that would transform everything.” (Delancey Place)

Berkshire Hathaway Annual Book Selections 2022 Every year for the annual meeting, The Bookworm in Omaha publishes a list of book recommendations from Warren Buffett and Charlie Munger, along with titles about Berkshire Hathaway. There are several new books as well as old classics on this list.

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Podcasts

Intelligent Investing with Jason Zweig, April 11, 2022. “William Green speaks with Jason Zweig, who writes the Intelligent Investor column for The Wall Street Journal. Jason edited and updated the revised edition of Benjamin Graham’s The Intelligent Investor, which Warren Buffett hails as “by far the best book on investing ever written.” Jason also wrote Your Money and Your Brain, a classic guide to the mental game of investing.” (Richer, Wiser, Happier)

Ethereum, Part 1, April 8, 2022. This is an interview of Vitalik Buterin, the inventor of Ethereum. The discussion gets into quite a bit of technical detail, but is very insightful when it comes to the use cases for the Ethereum blockchain. A common misconception is that Ethereum is simply another cryptocurrency. Ethereum is actually a decentralized blockchain on which developers build applications. Ether is the “native” cryptocurrency used on the Ethereum blockchain. (Naval’s Podcast)

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