Berkshire Hathaway Inc.

Berkshire Hathaway Inc.

1440 Kiewit Plaza
Omaha, Nebraska 68131
U.S.A.
(402) 346-1400
Fax: (402) 346-3375

Public Company
Incorporated: 1889 as Berkshire Cotton Manufacturing Company
Employees: 20,000
Assets: $9.46 billion
Stock Exchange: New York

Berkshire Hathaway and its subsidiaries are involved in several different businesses, the most significant of which is property and casualty insurance and reinsurance. It conducts this business nationwide through 12 subsidiaries, headed by National Indemnity Company of Omaha. Other businesses of Berkshire Hathaway include newspaper and encyclopedia publishing; manufacturing of candy, uniforms, home cleaning systems, and other products; retailing of furniture and jewelry; and operation of a savings and loan. Through the investment portfolios of its insurance subsidiaries, Berkshire Hathaway often buys significant shares of other publicly traded companies; its chairman, Warren Buffett, has become renowned for his stock-picking expertise.

Berkshire Hathaway began as a textile company. Berkshire Cotton Manufacturing Company was incorporated in Massachusetts in 1889. In 1929 several other New England textile manufacturers with much common ownership—Valley Falls Company, Coventry Company, Greylock Mills, and Fort Dummer Mills—merged into the company, which was then renamed Berkshire Fine Spinning Associates. This operation accounted for about 25% of the fine-cotton-textile production in the United States.

The glory years of the New England textile industry were numbered. The Great Depression of the 1930s contributed to its decline, as did competition from the South and overseas. Wages were lower in the South, and southern workers had fewer alternatives than New Englanders to working in the textile mills. Also, market factors favored the coarser types of goods produced in the South. Wage differentials also were a factor in foreign competition.

The New England textile business recovered somewhat during World War II, thanks to military demand for its products, and had a similar brief recovery during the Korean conflict. Still, the industry declined again after each of these upswings.

In 1955 Berkshire Fine Spinning merged with Hathaway Manufacturing Company, a New Bedford, Massachusetts, textile maker dating back to 1888. The resulting company, Berkshire Hathaway Inc., had more than 10,000 employees and nearly six million square feet of plant space, but its financial performance was dismal. Berkshire Hathaway closed its extensive operations in Adams, Massachusetts, in 1958, and the same year sold its curtain plant in Warren, Rhode Island, to Pilgrim Curtain Company. The company recovered a bit the following year; a contract negotiated between Berkshire Hathaway and its unionized employees in 1959 marked the first wage increase for New England textile workers since 1956. By late 1959 and into 1960, the company was operating profitably and had a backlog of unfilled orders. Depressed conditions returned quickly, however, and in 1961 Berkshire Hathaway cut its work week to four days at several plants and showed a loss for the year. In 1962 the company closed three plants in Rhode Island and showed even greater losses, due to depressed prices for its products.

The financial hemorrhaging continued into the mid-1960s, despite cuts in Berkshire Hathaway’s work force and an extensive plant modernization. In 1965 came a major change in the company’s management. A partnership—Buffett Partnership, Ltd.—led by investor Warren Buffett had purchased enough stock to control the company, and—in a resulting dispute—Seabury Stanton, a 50-year Berkshire Hathaway employee, resigned as president. Kenneth V. Chace, a vice president who had been with the company 18 years, replaced Stanton. Between this time and 1984 the company’s operations were gradually moved from New Bedford to Omaha, Nebraska, where Buffett was based.

Berkshire Hathaway was profitable in 1965 and 1966, but profits fell sharply as it began its 1967 fiscal year. The company was shopping actively for acquisitions to help it diversify, and in 1967 it entered the insurance business, buying National Indemnity Company and National Fire & Marine Insurance Company for a total of $8.5 million. Acquisition of the two Omaha-based companies, which were handling automobile insurance primarily, was expected to help Berkshire Hathaway overcome the cyclical nature of the textile business.

In 1968 the company made another significant acquisition, of Sun Newspapers, a group of Omaha-area weeklies. In 1969 it bought Illinois National Bank & Trust Company of Rockford. Buffett, who became Berkshire Hathaway’s chairman in 1969, tended to acquire companies whose management and products he liked, rather than buying companies with the intention to make major changes. His reputation as an expert investor grew during the 1970s.

Berkshire Hathaway’s expansion and diversification continued at a steady pace. During 1969 and 1970 it bought a controlling interest in Blue Chip Stamps, which in turn owned See’s Candies—a chocolate maker and retailer—and Wesco Financial Corporation, a savings and loan operator. The Berkshire Hathaway insurance operations grew with the formation of Cornhusker Casualty Company as part of the National Indemnity group in 1970 and Lakeland Fire and Casualty Company—now National Indemnity Company of Minnesota—also as part of that group, in 1971. Also in 1971, Berkshire Hathaway acquired Home & Automobile Insurance Company—now National Liability and Fire Insurance Company. In 1972 Berkshire Hathaway formed Texas United Insurance Company, which it later merged into National Indemnity; in 1976 the National Fire & Marine subsidiary acquired its only wholly owned subsidiary, Redwood Fire & Casualty Insurance Company.

In 1977 Berkshire Hathaway acquired Cypress Insurance Company and formed Kansas Fire & Casualty Company. The same year, it made another move into the newspaper business by purchasing, through Blue Chip Stamps, the Buffalo Evening News.

The News was a six-day paper, published in the afternoon, competing against a morning paper with a Sunday edition, at a time when morning papers were outstripping evening papers in popularity. After the acquisition by Berkshire Hathaway, the News began publishing a Sunday edition and competed intensely with its rival, the Courier-Express, which shut down in 1982, leaving the News with a monopoly.

Berkshire Hathaway formed another insurance company, Continental Divide Insurance Company, in 1978. Through a merger with a company called Diversified Retailing Company, Berkshire Hathaway acquired two more insurers, Columbia Insurance Company and Southern Casualty Insurance Company, in 1978; Southern Casualty was later merged into National Indemnity Company. Even with Warren Buffett’s growing reputation, not every company was eager to become part of Berkshire Hathaway; CSE Corporation, the holding company for Civil Service Employees Insurance Company, turned down an informal takeover offer in 1979. Because Berkshire Hathaway does not execute hostile takeovers, the acquisition was not pursued.

In 1980 Berkshire Hathaway spun off Illinois National Bank & Trust, a move required by the Bank Holding Company Act of 1969. A year later, the company sold Sun Newspapers to a Chicago publisher, Bruce Sagan.

In 1981 Berkshire Hathaway instituted an unusual corporate philanthropy program that won praise from shareholders. Buffett announced that shareholders would be able to direct a portion of the company’s charitable contributions. With this policy, he hoped to foster an “owner mentality” among shareholders, he said at the time. Shareholders responded enthusiastically, with more than 95% of eligible shares participating in every year since the program’s inception. The amount they were allowed to direct to charities of their choice was $2 a share in 1981; that figure had risen to $6 a share by 1989. Buffett’s own favorite causes are population control and nuclear disarmament.

During the early 1980s the textile business continued to languish, and the insurance industry was hit by poor sales and price cutting. Berkshire Hathaway’s performance, however, was buoyed by the performance of its investment portfolio. Buying noncontrolling but significant blocks of stock in such companies as The Washington Post Company, Media General, and GEICO Corporation, Berkshire Hathaway’s stock holdings grew in value by 21% in 1981—a year in which the Dow Jones Industrial Average declined by 9.2%. Berkshire Hathaway’s per-share earnings grew 23%.

In 1983 Blue Chip Stamps merged with Berkshire Hathaway; Blue Chip had been 60% owned by Berkshire. That year, Berkshire Hathaway also acquired 90% of the Nebraska Furniture Mart, a high-volume Omaha discount retailer—and the largest U.S. home furnishings store—that had been founded by a Russian immigrant, Rose Blumkin. The Blumkin family retained management and the remaining ownership of the store, although Rose Blumkin left the business in 1989 as a result of an argument with her children. Buffett has been known to promote the store during annual shareholder meetings, running buses to the store after the meeting, and many out-of-town shareholders have ended up buying furniture there. Also in 1983, another insurance company, National Indemnity Company of Florida, was formed and added to the National Indemnity group.

Early in 1985, Berkshire Hathaway participated in Capital Cities Communications’s acquisition of American Broadcasting Companies. Buffett agreed to put up $517.5 million in financing for the deal and came out with an 18% share of the merged company, Capital Cities/ABC. The investment community saw the move as unusual for Buffett, who had tended to hunt for undervalued companies and stay away from highpriced deals. Buffett, however, said he saw the investment climate changing, with good prospects for companies like television networks, which have intangible assets rather than heavy investments in plants and equipment.

Also in 1985, Berkshire Hathaway decided to leave the textile business. The company had sought, but not found, a buyer for the money-losing business, and ended up liquidating the business. Buffett lauded the efforts of Kenneth Chace—who remains a Berkshire Hathaway director—and of Garry Morrison, who recently had succeeded him as president of the textile business. Buffett also had kind words for the unionized textile workers, who had made only reasonable demands in view of the company’s financial position. In the end, however, Berkshire Hathaway could not compete with low-cost foreign textile producers.

Late in 1985, Berkshire Hathaway agreed to acquire Scott & Fetzer Company, a Cleveland, Ohio-based, diversified manufacturing and marketing company, for about $320 million. Scott & Fetzer’s products include World Book and Childcraft encyclopedias and Kirby vacuum cleaners. The sale was completed shortly after the beginning of 1986.

Berkshire Hathaway’s insurance business underwent several changes in 1985. In a tight market for insurance, many commercial insurance buyers needed a financially stable company to underwrite large risks, so National Indemnity, Berkshire Hathaway’s largest insurance company, advertised, in an insurance trade publication, its willingness to write property and casualty policies with a premium of $1 million or more. The advertisement produced an explosion in large-premium business for Berkshire Hathaway; the company wrote $184.5 million in net premiums for large accounts from August 1985 through December 1986, compared with virtually no such business previously. Also during 1985, Berkshire Hathaway reached an agreement with Fireman’s Fund Insurance Company which allowed it a 7% participation in Fireman’s Fund’s business. John J. Byrne, an executive of GEICO—an insurer partly owned by Berkshire Hathaway— had left GEICO to become chairman of Fireman’s Fund earlier in the year, and had arranged the deal. Another insurance move during the year was the establishment of Wesco-Financial Insurance Company by Berkshire Hathaway’s Wesco Financial Corporation subsidiary.

In 1986 Berkshire Hathaway acquired 84% of Fechheimer Bros. Company, a uniform manufacturer and distributor based in Cincinnati, Ohio. Fechheimer’s management had responded to the solicitation for acquisitions that appears in Berkshire Hathaway’s annual report.

During 1987, the stock market was continuing an upward rise that had begun early in the decade. Buffett’s policy of buying, for Berkshire Hathaway’s investment portfolio, undervalued stocks and holding them long-term, paid off well. In August 1987 The Wall Street Journal reported that in the five years since the market’s surge began, Berkshire Hathaway’s stock portfolio had grown in value by 748%, far surpassing the Dow Jones average, which increased 233.6%, and another market barometer, the Standard & Poor’s (S.&P.) 500 stock index, which gained 215.4%. When the stock market crashed in October 1987, wiping out the year’s gains, Berkshire Hathaway’s portfolio weathered the storm, it was up 2.8% for the period of January through November 1987, while the S.&P. 500 declined 2.5%.

Just before the crash, Berkshire Hathaway had bought $700 million worth of preferred stock, convertible to a 12% common stake, in Salomon Inc., a Wall Street investment firm whose fortunes were closely tied to the market. Even after the crash, however, Buffett expressed confidence in Salomon’s management and his conviction that the investment would prove valuable.

Another major event of 1988 was the listing of Berkshire Hathaway’s stock on the New York Stock Exchange. The stock had traded in the over-the-counter market previously. The move was designed to reduce transaction costs for shareholders. Berkshire Hathaway became the highest-priced stock on the exchange, at about $4,300 a share, up from $12 a share when Buffett bought the company. The price later ran up to more than $8,000 a share; a stock split could reduce the price, but would also encourage more frequent trading— something that Buffett would rather not encourage, preferring shareholders to be in for the long haul. Buffett himself owns 45% of the company’s shares, with a net worth of about $4 billion.

Buffett and Berkshire Hathaway have themselves proven to be long-term shareholders in other companies, leading some to see Buffett as a protector against hostile takeovers. During 1989, his company bought significant shares of The Gillette Company, USAir Group, and Champion International Corporation, with all the purchases widely interpreted as defenses against takeovers. Another major purchase was 6.3% of Coca-Cola Company, making Berkshire Hathaway Coke’s second-largest shareholder.

In 1989 Berkshire Hathaway bought an 80% interest in Borsheim’s, an Omaha jewelry store run by the Friedman family, relatives of the Nebraska Furniture Mart’s Blumkins. The store has since joined Nebraska Furniture Mart as a stop for attendees of Berkshire Hathaway’s annual meetings.

Buffett has been an outspoken investor and business operator. In 1989 the Wesco Financial-owned Mutual Savings & Loan Association of Pasadena, California, pulled out of the U.S. League of Savings Institutions, which was lobbying for more lenient provisions in the federal bailout of the savings and loan industry. Buffett likened the bailout to a “mugging” of taxpayers. Buffett has also spoken out on the need to tie executive compensation to performance.

Principal Subsidiaries

National Indemnity Co.; Continental Divide Insurance Co.; Cornhusker Casualty Co.; Kansas Fire & Casualty Co.; National Indemnity Co. of Florida; National Indemnity Co. of Minnesota; National Fire & Marine Insurance Co.; Redwood Fire & Casualty Co.; Columbia Insurance Co.; Cypress Insurance Co.; National Liability & Fire Insurance Co.; Wesco Financial Corp. (80%); Borsheim’s (80%); The Buffalo News; Fechheimer Bros. Co. (84%); Kirby; Scott Fetzer Manufacturing Group; See’s Candies; World Book.

Further Reading

Laing, Jonathan R., “The Collector: Investor Who Piled Up $100 Million in the ’60s Piles Up Firms Today,” The Wall Street Journal, March 31, 1977; Loomis, Carol J., “The Inside Story of Warren Buffett,” Fortune, April 11, 1988.

—Trudy Ring