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The Complete History & Strategy of Berkshire Hathaway (Part I)
It’s time. After 150+ episodes on great companies, we tackle the granddaddy of them all — Berkshire Hathaway. One episode alone isn’t nearly enough to do Warren and Poor Charlie justice, so today we present Part I: Warren’s story. How did a folksy, middle-class kid from Omaha become the single greatest capitalist of all-time? Why, like Jordan, did he retire (twice!) at the top of his game, only to reinvent himself and come back stronger than ever? As always, we dive in. Let’s dance.
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The Warren Buffett Playbook:
1. Money can create more money. (aka “Compounding”)
- Very early in life, Warren figured out something most people never truly grasp: money can be used to generate more money. It’s sounds simple, but once you fully internalize this concept, you’ll never see the world the same again. A given sum no longer represents what you could buy with it — a coffee, a phone, a car, a house, etc — but rather what it could grow to become over time. At the extreme, people like Warren are “cursed”, seeing prices for goods not as whatever the sticker says, but 5x, 10x, 20x higher — because that’s what the opportunity cost of parting with the capital represents.
- If you own an asset that’s compounding at a high rate with no obvious reason it will stop… dear lord do not interrupt it!! Most people are tempted to meddle: lock in gains, cover other losses, actively trade, or otherwise “manage” their investments. In the long run these actions are almost assuredly all value-destructive behaviors if you own truly great businesses.
2. Align incentives: be a doctor, not a prescriptionist.
- Warren likened stockbrokers — who got paid based on volume of trades placed, not investment performance — to “prescriptionist” doctors who were paid by their number and type of pills prescribed, versus actual patient outcomes. Once Warren created his investment partnerships (and then later transformed Berkshire Hathaway into something similar), he not only unlocked hugely better outcomes for his”patients”, but allowed created a path to pursue his own dream and become fabulously wealthy in the process.
3. You can’t expect to control other people’s emotions around money (or anything else).
- However with the right “ground rules”, you can mitigate the impact of others on your business and decision making — and even use them to your advantage.
- Warren’s early partnerships had a few ground rules and norms: partners will not know what securities are held, trading in/out is allowed only 1 day / year, and Warren will consistently set low expectations (leaving himself ample room to over-deliver). These set the stage for nearly complete freedom for Warren to operate as he saw fit — to the immense gain of his limited partners.
4. Sins of omission (selling or passing) nearly always cost more than sins of commission (buying).
- Warren is almost without doubt the greatest investor of all time. However even he made three incredibly stupid “unforced errors” early in his career that cost hundreds of billions in future gains: selling GEICO, selling American Express, and passing on the opportunity to invest in Intel with Arthur Rock.
- That said, Warren’s fourth great mistake (and in his estimation his greatest) was certainly a sin of commission: buying Berkshire Hathaway itself. Warren estimates this single blunder totaled $200B+ in opportunity cost over his lifetime.
- Thanks to Tiny for being our presenting sponsor for all of Acquired Season 8. Tiny is building the “Berkshire Hathaway of the internet” — something they’re so dedicated to, they even make and sell bronze busts of Warren & Charlie online! if you own a wonderful internet business that you want to sell, or know someone who does, you should get in touch with them. Just like Berkshire, they commit to quick, simple diligence, a 30-day or less process, and will leave your business to do its thing for the long term. You can learn more about Tiny here and find their Berkshire Nerds store here.
- Thank you as well to Vouch and to Capchase.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Season 1, Episode 26
Total Purchase price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Season 5, Episode 3
Total Purchase price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Season 4, Episode 1
Total Purchase price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Season 1, Episode 11
Total Purchase price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
Total Purchase price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Season 1, Episode 23
Total Purchase price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Season 1, Episode 20
Total Purchase price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Season 1, Episode 7
Total Purchase price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list…
Purchase price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Season 1, Episode 2
Methodology and Notes:
- In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
- We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: firstname.lastname@example.org
- We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
- All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
- This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
- We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!
- Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
- Thank you as well to Wilson Sonsini – You can learn more about WSGR at: https://www.wsgr.com/