The Oracle Has Landed

The Oracle of Omaha has landed in Europe. Specifically, Warren Buffett has put down initially in Germany.

In fact, Germany could prove rich hunting ground for Buffett and Berkshire. Press reports, such as this one from Bloomberg, state that most businesses in Germany are family-owned. They started after WWII and the founders are now reaching the stage -- and age -- where succession issues are becoming paramount.

This means some may be willing to cash out -- which brings us to Buffett. And Buffett to Germany on the start of his European tour.

Incidentally, some time back I wrote about private equity firms such as portfolio holding 3i Group (III/LN) buying some of the family-owned businesses in Germany. Some in Germany called these private equity firms "locusts" and slammed Anglo-Saxon capitalism.

It will be interesting to see if anyone on the Continent refers to Mr. Buffett in such a manner.

Comments

[David]

John,

I wondered the same thing about Buffett's ability to take advantage of these family-business sales.

I've heard others point out in the past that Buffett and Berkshire benefit from the US estate taxes (which Buffett has so heartily endorsed), in that taxes levied on family businesses (upon the owner's death) often force heirs to sell.

Is this also the case in Germany? I wondered about this myself in a recent post on Buffett's European dealmaking trips...

"Does Germany have some form of US-style estate tax which prompts families to sell their businesses, or are the Mittelstand companies hampered by red-tape and excessive regulation?"

What are your thoughts? Maybe some European readers have some info as well.

[John]

David: I don't know about German tax law/death taxes/etc. I think Buffett is looking to buy companies, but wants to keep the existing managements.

Buffett has said he's not in favor of those situations where a family has to sell off the business to pay death taxes, but I wish he'd be more forceful in saying that.

I will stress that just because Warren Buffett is the greatest investor of the last half of the 20th Century (and perhaps in history), that doesn't mean for a second that I'd want him designing American tax policy. Any more than I'd want him to be my heart surgeon, auto mechanic or roofing contractor -- and he'd agree with me I'm sure!

Many of Buffett's purchases of family businesses in the past have been where Berkshire buys 80% of the company with the rest remaining in family hands. But I don't know if that's still the case (because I don't follow Buffett as closely as many).

[David]

Interesting. Thanks, John.

One thing I overlooked is that Buffett likes the existing management to stay in place, so that means he is probably looking to buy the family businesses that are an inter-generational affair, kids are well-involved and interested in running the business down the road.

So why do they sell to Buffett anyway? Is it to get some added funds, or prevent someone else from buying them out?

I read the other day that one of the main reasons for family business failure, following succession, is the lack of cash on hand to pay for estate taxes and related expenses. Does selling out (or selling a majority share) to Berkshire give these families an assurance of money on hand to deal with these expenses?

[John]

David: I don't know, and maybe the situation is different from family to family. Perhaps Berkshire offers them a way to cash out (and enjoy the fruits of their life's work) while still running the business they love.

[Caglar]

I think Buffett would rather buy private, family-owned companies in Germany than public companies. Public firms in Germany must have representatives of unions, workers, and other stakeholders on their board. It is a different system and almost all stakeholders, not just shareholders, are listened to when making decisions. But this also gives a huge bargaining chip to unions and unions have not been shy to strike if their demands are not met. The kinds of businesses that Buffett likes will most definetely have members of such unions and I'm not sure how Buffett will like that. Of course there are also huge pension liabilities and very high federal and state taxes in almost all of Europe. Just some info from a European reader...

[David]

Very interesting. Thanks guys.

I did come across an interesting Bloomberg video on exactly this subject the other day (which also helped clear up a few questions).

Here's Buffett talking more about his European trip, Berkshire's acquisition strategy, and his criteria for buying family businesses.

http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vTREZRdvwgXU.asf

[John]

My thanks to you both, gentlemen.