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Who wouldn't love to pick up the phone and ask Warren Buffett for advice? People have spent more than $1 million just to have lunch with the man. He was voted the most admired corporate director in America by Directorship magazine in 2008. Chief executives of companies he has a stake in laud his patience, foresight, and ability to capture the essence of a complex financial situation in just a few words. They also like the fact that he usually leaves them alone as long as they're getting the job done.
Sometimes Buffett emerges from behind his desk and shows a side of himself that's far less familiar. When he sees something he doesn't like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment—jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus.
Buffett's virtues and philosophy are well known, and at 79, his ability to spread them throughout the business world has never been greater. In mid-February, his holding company, Berkshire Hathaway, (BRK.A) was listed for the first time on the Standard & Poor's 500-stock index, and the stock price and volume jumped as investors rushed in. His annual letter to shareholders, to be released on Feb. 27, is always one of the most parsed memos of the year. Berkshire's purchase of Burlington Northern (BNI) in November 2009—a self-described all-in bet on America—and its $5 billion stake in Goldman Sachs (GS) make Buffett a major stakeholder in the global economic recovery, with tentacles that span from coal to collateralized debt obligations. And his now infamous dressing down of Kraft (KFT) CEO Irene Rosenfeld over Kraft's purchase of Cadbury (CBY) proved that behind that Cherry Coke smile, there's still plenty of bite.
In speaking with CEOS for this story, and in writing the 2008 biography The Snowball with Buffett's cooperation, I learned a great deal about the way he manages the people he counts on to make money for him and his shareholders. He is, in many cases, just as genial and supportive as his persona would lead you to believe. "First my mother and then I have been able to call and ask his advice on matters affecting the company, large and small," says Donald E. Graham, CEO of Washington Post Co (WPO). "His advice has been worth billions to our not-so-large company."
During the credit crunch of March 2008, American Express (AXP) CEO Kenneth I. Chenault had to ask for help from Buffett at a moment when Berkshire's stake in American Express had lost $8 billion because of credit losses and concerns the company could not borrow to fund its operations. One might think Chenault had reason to fear the call. Instead, he knew Buffett, whose company owns 13% of American Express, would be his "confidence booster." Even in the highly charged atmosphere of a financial meltdown, his style is unwavering—"objective, direct, and he knows what he believes," Chenault says. The CEO felt fortunate that Buffett was indifferent to the market pressure on American Express.
At the time, Chenault faced intense pressure to cut the company's payout to investors, as his peers had done. Buffett "understood the reputational reasons why American Express should not cut the dividend," he says, and backed the decision to maintain it. Since the crisis, Berkshire's investment has recovered $4 billion of its value.
When other CEO friends got into trouble during the downturn, Buffett offered them more than advice. William C. Foote, head of wallboard and gypsum product maker USG (USG), first met the investor before Berkshire backstopped a USG stock offering in 2006, buying a 17% stake in the company. Foote tried to impress his new shareholder by reciting housing statistics from the 1960s to the 1980s—and was shocked when Buffett immediately responded with data from the 1940s and 1950s.
Although USG was struggling through bankruptcy, Buffett treated Foote with the benevolent neglect he generally displays toward managers whose companies are cruising. Foote would call occasionally and traveled to Omaha two or three times a year, spending a couple of hours chatting in Buffett's office before eating a steak at one of his favorite restaurants. He "doesn't offer suggestions as much as answer questions and provide perspective," Foote said.
The USG chief found the advice valuable and enjoyed the feeling that Buffett had enough confidence in him not to meddle. Then the housing market imploded and demand for wallboard collapsed. Buffett leaped into the fray in a way that benefited both Berkshire and USG. Berkshire took $300 million of a $400 million issuance of 10% notes convertible until 2018 at Berkshire's discretion into stock at $11.40 per share. (USG was trading at around $5.66 before the deal and is now at about $13.40, meaning the conversion feature is in the money). The equity sweetener effectively raised the cost of the notes, while limiting the impact on USG's income statement to its $30 million annual cash interest tithe to Berkshire, helpful at a time when USG is losing hundreds of millions of dollars a year.
When Buffett is unhappy with a CEO, you can tell mostly from what he doesn't say. "He criticizes by omission and faint praise," says former Wells Fargo (WFC) Chairman Richard M. "Dick" Kovacevich, a longtime friend and world-class manager whom Buffett has compared to Wal-Mart (WMT) founder Sam Walton. "If you are a close observer of him, it's not hard to figure out."
To be publicly criticized by Buffett, even subtly, might send a shiver through any executive who does business with him. It happened to Irene Rosenfeld on Jan. 21, after Kraft agreed to buy the iconic British candy company Cadbury for $13.17 a share. Berkshire is Kraft's biggest shareholder, with a 9.4% stake. Buffett had opposed an earlier version of the deal but said if Kraft put up more cash in a revised deal that didn't "destroy value," he would approve.
Kraft's share price rose because the remarks seemed to indicate that a modestly higher bid could meet his terms as long as it contained less stock. When Rosenfeld carried out a version of the plan, agreeing to pay $7.74 in cash and offer 0.1874 new Kraft shares for each share of Cadbury, investors assumed the two had worked out a deal. On the day it was announced, William Ackman of hedge fund Pershing Square Capital Management appeared on CNBC and predicted the investor would support it.
Instead, minutes later, Buffett turned up on CNBC and called Rosenfeld's agreement with Cadbury a "bad deal" for Kraft shareholders and a "big mistake." His televised griping stunned observers because it was so uncharacteristic. "You would think he would have been happy—she did what he wanted," says a major shareholder who asked not to be named because he values his relationship with both CEOs. "He reversed himself."
Buffett made it clear he thought the revised bid "destroys value." He seemed especially irate that Kraft had sold its profitable frozen pizza business to Nestlé (NSRGY) to raise cash for the Cadbury acquisition (and take its rival out of the bidding for the confectioner). He described the sale price of the pizza business as a cheap nine times earnings (a good deal for a unit that reported significant margin and sales growth during the recession). To avoid a $1 billion tax bill, he argued that Rosenfeld should have spun the unit off tax-free instead. Buffett also seemed to covet the business himself, saying, "I wish I would have bought the pizza business at nine times pretax earnings."
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