Buffett Takes His Own Advice in Walking Away From Unilever BidBy
Legendary investor has cited baseball on takeover discipline
“If people are yelling, ‘Swing, you bum!’ ignore them”
Warren Buffett is so good at dealmaking that bankers and salesmen study his musings endlessly for clues on how he does it. But even he doesn’t always get his way. And he has advice on that, too.
On Sunday, Kraft Heinz Co. withdrew its Buffett-backed bid for Unilever, which would’ve created the world’s No. 2 food-and-beverage company. It adds to a list of proposed transactions involving Buffett or his partners that weren’t completed, like reported attempts to buy Yahoo! Inc.’s core assets or take over Avon Products Inc., the cosmetics maker.
The decision to back off so quickly after Unilever said it’s not interested might seem illogical. Buffett’s Berkshire Hathaway Inc. has roughly $80 billion in cash that’s barely earning anything. And the proposed deal would’ve invested some of that in partnership with the private-equity firm 3G Capital, which has already made him a lot of money.
But it illustrates one of Buffett’s favorite investing principles: There’s no need to chase deals. Buying companies, he has observed, is like hitting a baseball. Don’t swing at one that’s out of your comfort zone.
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot,” Buffett said in the HBO documentary “Becoming Warren Buffett.” “And if people are yelling, ‘Swing, you bum!’ ignore them.”
Unilever, which makes Lipton teas, Knorr soup and Axe deodorant, met many of the criteria for acquisitions that Buffett lays out in Berkshire’s annual reports. It’s a large, simple business, with consistent earnings. But Buffett doesn’t do hostile takeovers. He says it’s not that he’s against them, they’re just not his specialty.
“Certain hostile offers are justified,” Buffett wrote in his 2015 annual letter. “We, though, will leave these ‘opportunities’ for others.”
The appeal of buying Unilever was clear. With 3G, co-founded by Brazilian billionaire Jorge Paulo Lemann, Buffett financed the 2013 buyout of H.J. Heinz and then the 2015 merger with Kraft. The combined company fired workers, cut costs and boosted margins. Berkshire’s 27 percent stake in Kraft Heinz, which cost about $9.8 billion, has more than tripled in value.
When news of the potential deal leaked on Feb. 17, Unilever was quick to put out a strongly worded statement denying interest. The $50-per-share offer, an 18 percent premium, “fundamentally undervalues Unilever,” the firm said, adding that it had “no merit, either financial or strategic” and that there was no reason to talk more.
Two days later, the companies issued a joint statement with a genial tone saying that Kraft Heinz “amicably” withdrew its offer. Berkshire and 3G, which together own about half of Kraft Heinz, had decided that Unilever’s response made a friendly transaction impossible, people with knowledge of the situation said.
“Kraft Heinz’s interest was made public at an extremely early stage,” company spokesman Michael Mullen said Sunday in an e-mailed statement. “Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction.”
In the HBO documentary, Buffett cited a book by Hall of Fame slugger Ted Williams to explain why he sticks to his rules. In “The Science of Hitting,” Williams included a chart that showed he hit at an All-Star level on pitches down the middle, but poorly enough to lose his job on those low and out of the strike zone.
“Unlike Ted, we can’t be called out if we resist three pitches that are barely in the strike zone; nevertheless, just standing there, day after day, with my bat on my shoulder is not my idea of fun,” Buffett wrote in a letter to investors in 1998.
By avoiding hostile takeovers, Buffett doesn’t get dragged into auctions. He says he likes to make an aggressive initial offer and rarely raises it. One exception was his 1999 agreement to buy MidAmerican Energy Holdings. After several days of badgering by the utility’s investment bankers, Buffett raised his offer by 5 cents to $35.05 a share.
“With that, I explained, they could tell their client they had wrung the last nickel out of me,” he wrote in his 2007 annual letter.
Buffett lost out in a chance in 2011 to buy Transatlantic Holdings Inc., when the reinsurer opted to take a bid from Alleghany Corp. rather than an offer from Berkshire. The billionaire’s lieutenant, Ajit Jain, had put pressure on the target company, giving it only days to make up its mind on an offer.
A plan to buy Constellation Energy Group Inc. also fell apart, when that company broke up an agreement and went with another bidder. Buffett probably didn’t lose sleep over it. Berkshire walked away with more than $500 million in 2008, including a termination fee, tied to the end of the deal.
Jeff Matthews, an author of books on Berkshire, says Buffett isn’t afraid to walk away from deals. “Buffett pays what he thinks something is worth and rarely stretches,” Matthews said. “People tend to want to sell to him so he usually gets his price.”
The most unusual thing about Kraft Heinz’s abortive bid for Unilever is that it became public. Most of the time, no one hears about the takeovers that Buffett opts not to pursue. In 2012, Buffett said he stepped away from a potential acquisition for about $22 billion because of the price. He didn’t identify the target.
“There is a steady pipeline of deals that get presented to Berkshire,” says Cathy Seifert, an analyst at CFRA Research. “They are kept quiet.”