Paraphrased notes from Berkshire's press conference in Europe at IMD.
q: to Mr. Weithemer. You are a 2nd generation family business owner. Why did you decide to sell your business?
a: We wanted to be a family business within a family business. We wanted more than money. We have a very big commitment to the area. We wanted a solution good for the people, our customers. We could keep all our values. We were too successful and we were afraid we are building a boat and not be able to bring it to sea. We sell because we wanted to and not because we had to.
q: You like family businesses. Why?
a: Well I like family businesses that are good businesses. There are many family businesses we don't like to. (chuckle) Well I got this letter from Eitan which just leapt out of the page. Eitan said if it's interesting to him know. It doesn't happen very often but I emailed him in 5 minutes. We moved very promptly. We gave him 4 billion dollars without ever visiting any of their plants. Our due diligence were sizing up Iscar and people that run it. I wish I had met him a lot earlier.
q: What companies you are interested in Germany?
a: We are looking for companies that will earn 50 million Euros pre-tax? We look at businesses we understand 5, 10, 20 years from now. There are certain types of industries I cannot see far into a future. Say software, it may be a good business but I just don't understand it. I am not looking for pet rock or hula-hoop business but I want business that have good return on capital now and 20 years from now. I like companies to have good management because we don't have people to run things. Then we need a price that makes sense. If we find that, we move.
There are many companies I don't know of.
a: I know you like names, but you won't get any. (chuckles)
q: Your practice of not doing due diligence. With German companies, do you think that will work to prevent a mistake?
a: I can make that mistake. But if I can't understand it myself, I don't want to rely on anyone else. My sharholders gave me money, some of them a big share of their net worth. They entrust me to take care of their money, I don't farm out that decision. They expect me to know enough about what I am buying. I will not farm that out to somebody else. This decision with Wrigley's. There was no one else involved. Either I understand it or I don't.
q: General observation about Germany. Robust GDP growth, etc. Does it factor in why you are looking at Germany?
a: It's gotta be a country with a lot of companies that meet our criteria. Nothing specific with German economy. Any transitory factor will not enter into our decision since we are going to hold it forever. Certainly, rule of law has to be there. I don't look at GDP trend, currency movements. Being able to find outstanding companies of size and not worth passing up for something transitory. US has problems now but if I get a call for the right business, I will buy.
q: How many targets have you identified?
a: No. If anybody had told us, we'd be meeting them now. We just want to send a message that we are around. If it's a good business, the owners should not sell it. But for some reason, they might want to sell. If that happens, Berkshire Hathaway will be the right choice. We won't urge them to sell now, but urge them when the time comes, to contact us first. If they care about the business and how the people are treated afterwards, Berkshire will be the best option.
q: Have you considered Danish companies?
a: Denmark will be a logical place. There are 40 countries in the world where it will make sense we will buy a company. Size of the country isn't the only factor. Israel wasn't the biggest country in the world, but ISCAR was made to order for us.
q: Have you considered companies in Italy?
a: There are plenty of companies in Italy that will meet our yardstick of quality. Whether they want to do anything to sell today, that is unlikely. But would they do it over the next 10 years, we hope to be the ones they think of.
q: Size of the companies?
a; The bigger, the better. I don't have a group of analysts or assistants. I do them myself. In order to make a large impact, we have to do big deals. We have a cutoff on the bottom size, we don't have a cut off on the upside.
q: ECB president says worst of credit crisis is far from over.
a: Effects of credit crunch are far from over at all. There will be rippling, secondary, tertiary effects in the housing bubble. Credit crunch happened as a consequence of a real estate bubble. In terms of crisis in the type of Wall Street type of effects, it is probably over but we won't know for sure. The Bear Stearns situation has taken care of that more or less. I don't think we are 3/4 way or 1/2 way through. You can have ripple effects in subprime loans that are 100% loans on residential real estate. you can eventually have effects even on people doing really sound things. There is a good chance most of that is not over.
q: What do you find attractive in a family controlled company compared to a public company?
a: They are not black and white in terms of being different. If you have a successful family owned company for a long number of years, often they have more in sync with Berkshire Hathaway rather than a public company that is managed to meet Wall Street expectations. But we have also bought public companies over the years. choice. If they've built a business for 100 years, they can preserve it best by going to Berkshire.
q: You are visiting Spain. Which companies are you interested in? Are you worried about housing slowdown in Spain?
a: There is enough to worry about in the US real estate market, I don't have to go abroad to worry about real estate market. In the U.S., real estate problem is bad, but we are actively looking to buy real estate brokerage firms. They may be losing money this year, but what I care about is the long term earning power of the business. With Iscar, war broke out. But it did not change my idea about Iscar's business. If a company tries to bring something to the table that competitors won't, that's what we look for.
q: Are there any German sectors that you understand well?
a: I certainly understand consumer goods well. I understand manufacturing businesses reasonably well. I've been looking at businesses since I bought my first stock when I was 11. If I look at General Motors whose business sells for 15 Billion,I ask if it is worth 15 Billion. I can understand Coca-cola. I am sure you could too. I can understand Wrigley's chewing gum or a Mars bar. I call it defining circle of competence. You can do better than someone else even if your circle of competence is smaller than somone whose circle of competence is ill-defined. I can understand insurance business. Understanding your own abilities and your limitations is important not only in business, but also in life.
q: Do you have minimum requirements on return on equity?
a: It depends on the business. If we can buy public utility business and we can earn 12% return on equity and be in a situation where we can put more and more money at 12% returns on equity, i view that as satisfactory. There is no cookie cutter formula. There is no investment formula. Different businesses have different characteristics. If you look at network television stations, they have no tangible assets but you may have to pay a premium to get into it. If you know there are only 3 competitors, you may pay more.
q: To Weithemer, how is the return on equity of Iscar?
a: We had major changes after Berkshire acquired. In our company, most people now drink Coca Cola and fly Net jets.
We are very successful.
q: Your views on the Euro?
a: On a purchasing parity basis, the euro looks fairly priced versus the U.S. dollar. I cannot tell what currencies will do in 6 months or 1 year, but since 2001, I have felt that the U.S. is adopting policies that will hurt the dollar in the long term. I am somewhat surprised that Asian currencies have not been stronger. I feel that purchasing power parity is of some significance, but I think the policies - fiscal and trade polices - are more important and the U.S. is following policies that will cause the U.S. dollar to weaken over long time. I never felt that way before but the world changed.
q: Swiss companies are you going to talk to them?
a: We don't talk to them. I talk to the world in a way that the message gets to specific companies. We hope they talk to us. I can't recall an acquisition I have made where I initiated it. I have said I am available. I wait until they call me. Chances are the best companies in Switzerland will not be selling today, but they may feel like selling many years from now.
q: Any names?
a: The other advantage is I don't talk to reporters about what we are buying, I don't even tell my board of directors. If I tell you first, they'd be very upset.
q: Europe versus emerging markets?
a: There are far more companies for us to buy and for them to sell to us in Europe. In emerging markets there will be very few earning 75 Million Pretax. To move the needle in terms of valuation of 200 billion, we are time and resource limited in terms of how many people we can talk to. I don't like to take more than a couple a year. Europe is a much better pond.
q: Are you turning to Europe because of the currency at the moment?
a: I don't worry about macroeconomic issues. I worry about rule of law. I'd rather be doing this with euro at 90 cents rather than 1.55 but that's not so important. If we can buy a good business, I am not going to pass it up because the currency is too high or too low.
q: Haribo candies.
a: I haven't tried it yet. I am predisposed to candy. It's more important if other people like it. There will be 1.5 billion ounces consumed today of Coca cola product. I have this vote from the rest of the world. The world has been voting this way since 1886. I am not getting big surprises. I am not getting huge upside surprises either. But I am not going to get huge downside surprises either.
q: RBS insurance arm? Is it true you have ruled it out?
a: I have ruled out doing anything with RBS. Nothing against RBS, I just made that decision. Insurance companies I understand quite well. There will be surprises that's why there is insurance. We have terrific people in our group. It's taken us 40 years to get there. The insurance business as I wrote in the annual report. Property and casualty insurance had extraordinary years in 06 and 07 in part because of lack of disasters following Katrina in 05. The frequency and severity in auto insurance trends became more favorable for a few more years than I thought and it has reversed itself. It's still a business I like. We will do more and more in property and casualty insurance for the next 100 years.
q: Person who greatly influence you in ability to make important decisions.
a: I was extraordinarily lucky. I think you are quite influenced by the heroes in your life. I was blessed in that I never had one who let me down. My father influenced me the most. In investment, no question Benjamin Graham enormous influence on me. My partner Charlie Munger has enormous influence in me. My wife has an important influence on me. I would be a different person if I hadn't been lucky enough. Be sure to associate with people better than you are.
q: You accomplished a lot. You are still young. What goal do you have in life? How about successors?
a: More than half of the time with my directors have been about successors. A key part of job to have a successor in place. Every year, I require the managers to tell me if something happened to him that night, who should I think about as successor and what are their strengths and weaknesses. I exactly like what I am doing in Berkshire. We have 19 people. In the last 15 years, nobody has left. We have a group that I trust. They trust me. We get a group I like to work with everyday.
q: The world has changed. Is it possible that one day, Berkshire will have 50% of its portfolio outside in the U.S.
a: I don't think that's impossible. We have businesses operating internationally from a U.S. base. Coca-cola earns 80 percent of business outside of the US. It is not impossible that 30-40 years from now, Berkshire had more outside of the U.S. but not a few years from now. We don't sell what we own now and the momentum from what we own now is meaningful.
q: What is your reason to be in Germany? Is it for conversation or is it a shopping tour?
a: The Berkshire Hathaway annual report is probably the main vehicle on conveying what Berkshire is. It's been effective and I have been doing it for a long time. Over the years, Berkshire has achieved something that sets us apart from other companies of size that might be interested in acquiring companies. Plus we have done transactions with other people who talk to other people. I got a call from Fort Worth Texas. He decided not to sell to a competitor who would fire half his staff. He did not want to sell to a financial operator . He went to Omaha. He did not like the thought of what might happen if something happened to him and his children.
a: I should have bought Pepsi too. I think I understand Frito-Lay and it's an even better business than the soft drink. I always look at Pepsi. At a price, I'd be it. It would be competiting with Proctor and Gamble, Coca-cola, American Express. Geico runs a different portfolio. I am buying maybe 3 stocks a year. Pepsi is always in my radar screen.
q: Pesident of the United States?
a: I supported both Obama and Clinton. Before either announced for presidency, I told them I would support both of them. I would be equally happy if either of those two won. At this point, Obama seems to me to have the nomination. If Hilary wins, I'd just be as happy. I think McCain is a first class human being. I don't agree with him on as many issues as I agree with Obama. I think U.S. will do well over time whether it's under Obama or McCain. It's amazing you have 7 for 1 increase in GDP per person in the United States. We had presidents like Harding and Coolidge, but over all, it works pretty well. They say, buy a stock whose business is so good, because sooner or later, an idiot will. I think U.S. will do well over time.
q: Are there any bad decisions?
a: Plenty of those but on balance, not much I would change. In my early 20s, I bought a gas station in Omaha and I lost 20 percent of my net worth. Those of you who know compounding, it's cost me about 12 billion dollars. If you follow Graham, you may miss out on the big winners, but you won't lose badly. In our history of Berkshire, I don't think we've had a realized loss that's amounted to more than 1 percent of the portfolio. You can still buy the book and read chapters 8 and 20 and you will never lose the money.