Deals without Bankers: Salomon and Benjamin Moore
A. Salomon, Inc. The first time I personally experienced this aspect of Buffet’s approach occurred in connection with the sale of Salomon, Inc. to Travelers. Salomon was a major investment bank which had a near death experience in 1991. Berkshire was a very substantial shareholder of Salomon and Buffett played a significant role in its rebuilding.
Although Delaware decisions in the wake of Smith v. van Gorkum suggested the advisability of the board of directors of a company being sold getting a fairness opinion from an outside investment banker, Salomon did not get such a fairness opinion to validate the price its shareholders received in the sale of the company. It did put Salomon Brothers investment bankers to work getting the same type of information and analysis which would normally be given to a board of directors in connection with a business combination for which Salomon Brothers had been retained to give a fairness opinion.
Salomon considered the advisability of securing a fairness opinion, but as the proxy states “ . . . a fairness opinion would have provided little, if any, incremental value to the deliberations of the Salomon Board given the insurance and securities industry expertise of the officers and directors of Salomon and its subsidiaries who were evaluating the Merger from a financial point of view.”
B. Benjamin Moore. My next experience with Warren Buffett and his willingness to do transactions without involving an outside investment banker occurred when I was an outside director of Benjamin Moore. Benjamin Moore was essentially a family- controlled corporation which had acquired enough other shareholders to be traded in the over-the-counter market. The company decided that it was time either to go public or be sold. It retained an investment banker to advise it. After studying the company, the investment banker determined that the company should be able to command a price of $X. It then tried to find buyers at that price, but proved unable to do so.
I suggested to the CEO that Benjamin Moore fit perfectly the model of companies that Warren Buffett liked to own. It was a family company, its paint products were highly respected in the marketplace, the workforce was stable and long tenured. Further, it had a long history of consistent profitability. I asked whether I might call Buffett and ascertain his interest. The CEO said, call him.
Buffett responded to my call by asking me to send him copies of the public documents. I did so. A week later, he called and, without much questioning, he said he would pay $1 billion for the company. When I reported the offer to the board, it asked whether or not we could negotiate a higher price. I indicated that I doubted it. After discussion, the board agreed that $1 billion was a fair price.
When I called Buffett to tell him that the board thought we could strike a deal at that price, he said that was splendid. He only had one request: he would like to meet the CEO and asked whether we could fly to Omaha. Buffett and Charlie Munger met with the CEO and talked about the company for a little more than an hour. When we left, we had a deal.
Lawyers for Berkshire Hathaway subsequently did due diligence. Benjamin Moore hired a banker to give a fairness opinion. The deal was consummated at the price Buffett offered in the phone call we had after he reviewed the public documents.
Would the intrusion of an investment banker into the process have added value? I don’t know, but I don’t think so. For many years after the transaction was completed, I would ask shareholders of Benjamin Moore whether they were happy, employees of Benjamin Moore whether they were satisfied, and Warren Buffett whether he was content. Everyone responded positively. That’s the mark of a good deal.
Robert H. Mundheim is Of Counsel to Shearman & Sterling where he advises on corporate governance issues and buy-outs. Previous positions include Senior Executive Vice President and General Counsel of Salomon Smith Barney Holdings Inc.; co-chairman of Fried, Frank, Harris, Shriver & Jacobson; Dean of Penn Law School (1982-1989) and University Professor of Law and Finance at Penn, where he had taught since 1965; General Counsel to the U.S. Treasury Department (1977-1980); Special Counsel to the Securities and Exchange Commission (1962-1963); and Vice Chairman, Governor-at-Large and a member of the Executive Committee of the National Association of Securities Dealers (1988-1991). He has been a director of eCollege, Benjamin Moore, Commerce Clearing House, Arnhold & S. Bleichroeder Holdings, Inc. and First Pennsylvania Bank.