
Berkshire Hathaway of the Internet - pknerd
https://medium.com/@awilkinson/the-berkshire-hathaway-of-the-internet-391a8ee83db#.4msesyaie
======
nrao123
This is what I wrote to a friend in an email on this post:

A few challenges with the trying to replicate the Berkshire model on the
internet:

##Lower cost of Capital (Float): One of the unsaid rules of BK is that their
cost of capital is cheaper than most operating companies because of thier
insurance float (Ajit Jain, General RE, GEICO etc). ​So, they can take an
existing business & assume absolutely no changes to their changes & still make
better ROI because their capital structure is more efficient. It is a
different matter that they take portfolio companies like BNSF & use float to
expand their capital projections (this is like making a private investment vs
a public investment. From the BK 2015 Letter on how capex is linked to float:

 _After a poor performance in 2014, our BNSF railroad dramatically improved
its service to customers last year. To attain that result, we invested about
$5.8 billion during the year in capital expenditures, a sum far and away the
record for any American railroad and nearly three times our annual
depreciation charge. It was money well spent. BNSF is the largest of our
“Powerhouse Five,” a group that also includes Berkshire Hathaway Energy,
Marmon, Lubrizol and IMC. Combined, these companies — our five most profitable
non-insurance businesses — earned $13.1 billion in 2015, an increase of $650
million over 2014._ *

##Bullet proof Revenue (Moat): One of the operating assumptions behind BK's
acquisition is that the business does well regardless of management.
Therefore, if the revenue assumptions hold (i.e. this is the moat part of the
strategy)- then the float kicks in & does magic.

However, the challenge with using a BK model in tech i.e. acquiring companies
& being hands off without PRODUCT ENERGY- the products atrophy & revenues
goes. The reason that BK hates tech is because there is moats are hard to
sustain & it is too competitive.

I am looking at Tiny's portfolio:
[http://www.tiny.website/](http://www.tiny.website/) & I am hard pressed to
think of any product that has moat. I would suspect that once the founder
leaves in almost all of these cases, the products will atrophy.

~~~
erdevs
This is an outstanding comment. Few people understand what Buffet and Munger
mean when they discuss "moat" and even fewer understand the importance of cost
of capital in BK's investment successes.

It may be possible to build a BK of the internet but it's not easy to imagine
how.

~~~
dave_sullivan
Buffett has famously stayed out of tech companies because he (self admittedly)
doesn't understand them.

A BK of the internet would buy ugly tech companies, turn them around, and sell
them. Buffett is definitely not the only guy in that business, but he's
probably been the most successful. An internet version of that would have to
really really understand technology and the markets driving it, along with
understanding the modern financial system and sources of capital (to finance
buying the companies). It is kind of a weird combination.

However, I do think we're going to start seeing waves of consolidation in
tech, and maybe some interesting turnarounds.

~~~
tim333
Buffett has bought some tech in recent times - IBM and Apple. More established
stuff with cash flow.

~~~
dave_sullivan
Indeed. What do you think he meant when he talked about not wanting to invest
in tech companies in the past? Or did he never say that?

------
tptacek
Lots of people here pointing out that BRK's buying strategy isn't what
distinguishes their business so much as their access to insurance float.
That's a good point, probably the most important one.

Also worth looking at is the relative contribution of these kinds of
acquisitions to BRK's overall performance. Simply put, it's not Borsheim's and
See's Candy that give BRK.A a $425B market cap. There's an enormous portfolio
of high-ticket investments --- many of them in gigantic public companies ---
that dwarf these mom-and-pop acquisitions. Even among the wholly owned
subsidiaries, and even in the smaller "Manufacturing and Retail" segment,
contributions are dominated by very large companies like Clayton Homes.

Noted below in the thread, the "powerhouse five" of Berkshire's portfolio:
BNSF Railroads, IMC (one of the largest metalworking companies in the world),
Lubrizol, Berkshire Energy, and Marmon (one of the largest home builders in
the US). I doubt very much the acquisition of any of these companies followed
the casual pattern listed in the post. Some of them weren't even acquired all
at once.

Finally: having twice been involved in the sale of a company I was a principal
at, the acquisition process was pretty unlike the breakdown this person
provided. It was somewhere in between what he reports Buffett's process to be
and what he claims the normal process is. The actual decision --- getting to
an MOU with a notional price --- was reasonably informal and didn't take up
much time. Certainly nobody did a road show. The rest of the process was
legal, and I very much doubt Berkshire avoids much of that work either.

~~~
valuearb
As I've said separately, I believe BRK's float is over-rated. It's just a loan
and only a small part of their capital base.

But your focus on the "powerhouse five" over See's Candy's is backwards. The
powerhouse 5 are all very new acquisitions, and were purchased in part because
See's candies was so amazingly successful as an investment.

In 2011, Buffett said that See's had directly earned $1.65B for Berkshire
since it's acquisition. Those earnings were reinvested in Berkshire, so over
the years they've probably added as much as $10B to Berkshire's value. That's
enough to have enabled the purchase of one of the "power house 5" by itself.

~~~
nrao123
Not sure why you believe float is over-rated. Buffet himself has said that a
$1 in float is equal to a $1 of value. BH's market cap is about $300 BN &
their float is about $90BN which means Buffett considers the float to be about
~25-33% of the total value of BH.

 _Another measure of Mr. Buffett’s firepower: Berkshire Hathaway’s insurance
float, paid in premiums that can be invested until claims have to be paid.
Float was about $89 billion on March 31 2016, compared to about $88 billion at
the end of 2015._ [http://blogs.wsj.com/cfo/2016/05/09/at-berkshire-hathaway-
ca...](http://blogs.wsj.com/cfo/2016/05/09/at-berkshire-hathaway-cash-tumbles-
as-float-inches-up/)

~~~
rokhayakebe
What is a "float?"

~~~
valuearb
Part of the money insurance customers pay the insurance company for insurance.
They are required to hold reasonable amounts in safe investments to pay out
claims with, and the insurer gets to earn interest or investment gains on it.
The longer term the insurance commitment the more aggressively the insurer can
invest part of it, because it won't be "owed" for years,

~~~
rokhayakebe
Thank you.

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tim333
Buffett's own writing on selling him your business is quite interesting.
"Appendix B" at the end of the 1990 letter
[http://www.berkshirehathaway.com/letters/1990.html](http://www.berkshirehathaway.com/letters/1990.html)

~~~
ruleabidinguser
I wonder what the good reason to sell is that he described. Like he pointed
out, when you sell youre moving your safe assets to risky assets. Odd.

~~~
hxta98596
> when you sell youre moving your safe assets to risky assets

That's not exactly what he is saying nor what he means. Both are risky assets.
A 100% owned business you deeply understand is still a very risky asset. On
its own. I agree with aeden's comment that diversification is one of the main
reasons to sell.

The other good reason to sell...you get cash! Sure some of the cash will
"probably" go to a diversified stock portfolio but some of it will be spent on
cool stuff. You can't use stocks to buy your dream vacation home or donate
money to charity for it to be spent on medical research. Cash is also the
reason to sell.

Lastly, people die. A business founder must sell the business or give it to
someone else at some point in one way or another or it will be done for him or
her.

~~~
ChefDenominator
That last part, death, is important, especially to Buffet. He supports the
death tax because it strongly encourages business owners to sell to some
outside investor.

My understanding is that many businesses cannot support providing the
Government with amount of cash necessary pay the tax, or the net reduction in
income makes running the business not worthwhile.

Note how the letter is worded to carefully state that the family members will
still have some ownership and management will be maintained. While this is
certainly wise acquisition tactic, it is also very appealing to a seller who
is on the margin and primarily selling to avoid the death tax.

(If you are thinking, "but the inheritor will still have to pay the tax on the
cash," you are correct, but paying tax on cash still provides immediate
payback with what is left over, whereas running or even just owning a business
or any investment asset for 10+ years and getting zero or close to zero is not
going to be desirable to a great many people.)

~~~
valuearb
Buffett doesn't support estate taxes because of self interest, that would be
silly as it's just a tiny factor in Berkshire Hathaway's business. He just
doesn't believe the concentration of wealth and power is healthy for a
democracy. That's a big reason why 99% of his wealth is going to charity
instead of his kids.

Now I think he's wrong about this. Rockefeller had a roughly ten times greater
share of our nations wealth as Gates or Buffett ever had. And somehow our
democracy survived and flourished, because inheritances typically get split up
among children, grand-children and eventually hundreds of great-grand kids and
great-great grand kids, and predominantly those descendants dissipate the
wealth because they don't have the same drive or abilities as the wealth
creator.

And lots of that money ends up in charities before it's all gone.

~~~
ChefDenominator
Non-profit entity is not the same as "charity". Most of the large non-profits
operate on a percentage of the interest earned on a large endowment. It's
essentially a scam for the very rich and the banks. If the purpose of the
entity were truly to benefit the needy, then they would operate directly on
donations and not withhold so much funding from those in need.

I specifically discussed sellers who are _on the margin_. While it can be
difficult to know exactly how many of these are, I'm willing to bet this would
result in a very real and measurable reduction in investment opportunity for
Berkshire. If it were 10 businesses in a year at Buffet's stated minimum of
$10 million annual net profit, then that would represent $80 million in annual
revenue for Berkshire.

In the world of big business, famous personalities, and politics, my position
is to assume the worst case scenario, which is that the only reason someone
like Buffet supports the death tax is because he profits from it. In this
case, it is not a coincidence.

~~~
tim333
>my position is to assume the worst case scenario

If you always assume some extreme in the absence of evidence your assumptions
are probably not going to be very accurate.

There's a bunch of evidence Buffett is not like that.

~~~
ChefDenominator
I like how you removed all of my prerequisites so as to completely change my
position.

------
crdb
The TL;DR: if you skip the admin and due diligence of a deal, you will close
more deals. For example: "I couldn’t understand why buyers felt they needed to
dig into accounting minutiae".

However, to paraphrase something I read from a sailor, "every regulation in
the Navy is written in the blood of your predecessors". If you do 10 deals,
one might wipe out any upside from the other 9, even if you got more upside by
negotiating a better valuation, and having a faster turnaround and lower cost
of doing business. And of course, if a buyer got the reputation of not doing
due diligence, it would attract all the problematic companies.

There is a reason behind every "annoying" stage, and those reasons
collectively explain why the entire industry is made of buyers that follow
those stages.

Since he runs 10 businesses, it is probable that the author has other ways of
doing the work. He will keep track of most of the promising names in his
industry, he will have a network of insiders to keep him appraised of the real
story in those companies (although never officially), and he will know when
the timing is ripe. His good relationship with his existing bankers means
financing will be quick and standardised already, his back office experienced
and streamlined. His experience tells him how you can play with what numbers
to present a rosier picture than the reality, as well as how much to offer to
get a founder to come to a quick decision. Unless he decides to go buy palm
oil crushing plants in Indonesia, it might work out quite well.

~~~
dchest
As far as I understood the linked post, that's an incomplete tl;dr. You missed
these important parts:

1) In the words of Buffet, "there would be no chance that a deal would be
announced and that the buyer would then back off or start suggesting
adjustments (with apologies, of course, and with an explanation that banks,
lawyers, boards of directors, etc. were to be blamed)"
[[https://news.ycombinator.com/item?id=13906176](https://news.ycombinator.com/item?id=13906176)].
Most of such re-negotiations can only be explained by screw ups in the
decision making process or dishonesty of the acquirer trying to squeeze more
from the tired owners.

2) Not screwing with the acquired businesses: they buy companies because they
know their owner-managers are what made these companies successful, so it
would be a stupid decision to replace them or change their operations.

~~~
nikanj
Selling your company definitely has a certain Darth Vader feel to it. The
buyer usually alters the deal, and the only thing you can pray for is them not
altering it any further.

~~~
valuearb
Get a second buyer on the hook. Then they both will pray you don't alter the
deal any further.

------
amix
I doubt The Berkshire Hathaway is successful because of their processes. They
are successful because Buffet and Munger are geniuses in their respective
field and to build the internet version of The Berkshire Hathaway, you would
probably need to copy the wisdom and not merely their processes.

There’s an interesting video about how Magnus Carlsen makes his chess moves.
He makes the next move in seconds and then thinks if it’s the right move, ref:
[https://www.youtube.com/watch?v=PZFS0kewLRQ](https://www.youtube.com/watch?v=PZFS0kewLRQ)
\-- And maybe Buffet does a similar thing, he can look at balance sheets and
quickly decide if it's a business worth buying or not.

~~~
Lordarminius
> I doubt The Berkshire Hathaway is successful because of their processes....
> Buffet and Munger are geniuses

Numerous writers in different fields have debunked this myth. Starting with
Taylor in organization theory [1]

It is the process that matters, not some undefined 'talent'

1\.
[https://en.wikipedia.org/wiki/Organizational_theory](https://en.wikipedia.org/wiki/Organizational_theory)

~~~
Spooky23
If that were true, there would be many more successful conglomerates like
Berkshire Hathaway.

Processes are ante into the game, great process and lousy leadership will
fail.

~~~
Lordarminius
There ARE many more successful conglomerates like BRK.

Many, many, more.

~~~
valuearb
There are actually zero.

First there aren't many $500B conglomerates to start with, and not with BRK's
returns.

Second, there is almost certainly not another conglomerate even a tenth the
size with such a tiny executive staff. He's got only 24 people total at the
corporate headquarters, and their role is mainly just doing the tax returns.
He has more than a hundred businesses reporting directly to him.

It might be the least duplicatable process in the world.

------
zbruhnke
Am I the only one here looking at Tiny's site and wondering when they acquired
buffer?

I didn't know it was sold and can't seem to find an announcement anywhere?

~~~
jswny
Well they say "We start, invest in and buy wonderful internet businesses.
Here’s a few of them..." so maybe they are just an investor in Buffer?

~~~
zbruhnke
Ah! Good catch you're probably right ... it should probably be more clear on
their site which ones they own a majority stake in and which ones they are a
minority stakeholder in

~~~
JohnnyConatus
I don't know if this is true in Tiny's case but many VC firms do this
intentionally to mislead people into thinking they're a large investor in big
hits. I.e., they'll put in a relatively small amount of money (and overpay) in
a later round for a unicorn like Uber just so they can have the Uber logo on
their site.

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mooreds
Where's the float?

One of the reasons BH has an advantage is their insurance business, which
throws off large amounts of investible capital. He talks about how special and
important the insurance businesses are in his annual letters. They make it
easier for Buffet to be patient or to handle bad deals.

Does Tiny have access to this, or something like it? Maybe existing SaaS
products that have very high gross margins?

~~~
valuearb
Yea, float is over-rated as a BH advantage. It's simply a low cost short term
loan, over many years it's even a negative interest loan, but in bad years it
costs lots of real money.

He has to keep money ready to repay float when insurance subs need it, or
regulators would shut them down. So it can't be directly invested in long term
equities.

Any investor who wanted to ape Warren could borrow against 20% of their
portfolio and achieve a similar "advantage". You shouldn't borrow more because
one day the market will drop 50% and you could have your entire portfolio
liquidated at the worst possible time.

And obviously borrowing doesn't help if you aren't a skilled investor, if you
are paying 7% to try to earn 8% the extra return isn't worth the risk. But if
you are the next Buffett with the skill to average over 30% a year for your
first decade with a smaller portfolio, it's a reasonable strategy.

------
jacques_chester
Berkshire Hathaway derives no small part of its advantage from extremely cheap
internal financing (insurance float) and very small leadership organisation
(Buffet and Menger).

I don't think this yet qualifies as the Buffet of Baud. But I admire the
excellent marketing.

------
apapli
It sounds great, but I'm not sure the space needs to be "disrupted".

I get it that there are a number of steps needed to buy a business, but this
isn't exactly buying a chocolate bar from the supermarket where all we need to
check is the "best before" date has not passed.

Proper, thorough, due diligence takes time, and knowing how much you are
paying for a business versus how much you are handing over for goodwill (which
is far from guaranteed) is hard, let alone being able to understand cultural
fit, internal politics, market forces and the myriad of other internal and
external factors that all influence a business on a daily basis.

Warren Buffet apparently does it quickly (I didn't check beyond the claim in
this article), but he has a talent for it, and I will guess a fairly large
research team that are fully prepared and informed before they approach a
prospective target.

Comparing Warrent Buffets approach to this service to me comes off like a very
well-intentioned but frankly naive initiative.

Of course, if the author is planning to buy businesses at a massive discount
to what they are truly worth then he indeed can probably skip some of the
diligence - but that's a pretty poor outcome for the seller.

~~~
valuearb
Warren's key competency is recognizing and valuing good businesses, he's not
farming that out to any research team, even his own employees.

Buffet has 24 total people at corporate, mostly finance people working on tax
returns and a CFO obviously. Warren evaluates the business, values it, makes
the offer, and relies on his CFO I believe to do basic due diligence and close
the deal.

But the key value Warren relies on is "moat" and that's a hard one to quantify
for many tech businesses. Warren can buy a chain of furniture store because he
thinks they are run well, efficiently but most importantly have a strong moat
because of a great brand and locations in their market. So he can be confident
the business will be around in decades.

Will a web development company be? Will the web be? Those are harder questions
and make applying Buffett's techniques far harder in this market, even if
author had similar skills to Buffett, which is also very unlikely.

------
Animats
Berkshire Hathaway buys successful operating companies, preferably with a long
history. They look at GAAP earnings, assets, and debt. Evaluating such
companies is straightforward. This simplifies acquisitions.

They rarely buy "growth companies". Those are speculative investments.

------
markgavalda
This is awesome! I can imagine these kind of buyouts becoming really popular
in the future. The usual process (detailed in the post) is awful and has to be
disrupted.

------
phkahler
Finally the reason for the different approach is covered in the P.S. at the
end:

>> They are fiduciaries managing money for huge institutional investors.

Most of the due diligence is the intermediary covering their ass. In fact, a
huge institutional investor is also an intermediary for a bunch of other
people and they like to cover their ass. It's all about minimizing risk of
getting sued by someone.

------
bluetwo
I think every time someone uses a comparison to Warren Buffet or Berkshire
Hathaway to market their own product, they should pay WB a commission.

That said, it should be noted that WB doesn't like tech companies and invests
in very few. He likes businesses that have steady cash flow, containable
costs, and reliable yield/growth. This isn't tech.

~~~
the-dude
Mouser.com is a Berkshire Hathaway company.

~~~
bluetwo
Like I said, very few. This mouser is more a retail play than a tech play. He
also invests in IBM and Apple, both of which have yields to justify the
investment. Don't expect to see him put money into
Facebook/Twitter/Snap/GoPro/Twillo any time soon.

------
bradgessler
Its brilliant. Andrew wrote the post in a way that makes it feel so obvious,
even though its not. Reading it felt analogous to some of early 2000's YC
writings and coverage.

------
zekkius
This post wholly ignores why Berkshire Hathaway is successful. The company is
not successful because they make selling companies to them easy. They are
successful because they buy good, cash rich businesses and find excellent
management to run them.

~~~
djrogers
The post isn't about why Berkshire Hathaway is successful, it's about why
their acquisition process is successful. Totally understandable to focus on
the latter and gloss over the former in that case.

------
louprado
> he has amassed a collection of over 65 wholly owned companies

Just a side note, the above likely referenced this Wikipedia page[1], but it
misses that MiTek, which _is_ listed on that page, represents holdings of
another _20 companies_ that aren't on that page. I didn't research if other
BRK company are also holding companies.

I currently consult for two companies, a PaaS company and a CRM/SaaS company.
Both were recently purchased by MiTek and focus on the Builder Industry. They
both continue to operate independently as do the other companies held by
MiTek. This follows the traditional BRK business approach to keep the existing
management and corporate culture in place of the acquired company.

Prior to that acquisition I thought the BRK team was not tech savvy. I can
tell you first hand (at least when it comes to the MiTek team) that is not the
case.

[1][https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berksh...](https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berkshire_Hathaway)

~~~
valuearb
The MiTek people may be tech savvy, almost certainly Buffetts sign off for
their purchases is cursory, if they think it benefits their business and
purchase price was reasonable.

Berkshire recently bought Apple stock but I believe that was done by two young
investment managers he lets manage smaller parts of the Berkshire portfolio.

Buffett is clearly more tech savvy than he lets on, but his objection to tech
investments is he doesn't think he can identify durable competitive advantages
there. It's certainly harder.

------
rimliu
The best thing about Berkshire Hathaway in the context of internet is their
website. I've given it as example numerous times.

------
Exuma
As someone currently selling their internet company for several million... I
could definitely appreciate a BH type buyer.

------
akhatri_aus
I immediately thought of Naspers. Not a single mention of it still.

------
quanticle
Are the emoji on every list item really necessary? I find that they don't add
any meaning to the post, and they're just distracting.

~~~
jlgaddis
To share an alternative viewpoint, I read your comment and wondered _" what
emoji?"_. I had to go back and skim over the article again -- and reading it
in full -- to see what you were referring to.

In other words, I really didn't even notice them. To me, at least, they
certainly weren't a distraction at all; in fact, just 30 seconds after closing
out that tab I didn't recall seeing them in the first place.

~~~
jlgaddis
_Edit:_ s/and reading it/after reading it/

------
tardo99
lol

