Tuesday, July 15, 2008

Selling to the World’s Best Investor

Selling to the World's Best Investor


As I walked past the Plaza Hotel near 58th Street and Fifth Avenue on a glorious May morning in 1994, I heard someone call out, "Warren Buffett!" Turning in the direction of the voice, I saw a woman in a bright red dress stop Buffett on the sidewalk and start a friendly conversation with him. Buffett, dressed comfortably in an off-the-rack suit, listened patiently to the woman, who, it turned out, was a shareholder of Berkshire Hathaway, Buffett's hugely successful company. At the time, the legendary investor was the second richest man in the United States, and a share of Berkshire stock was about $20,000.

As it happened, I was in New York that day to meet with our financial advisors at Morgan Stanley to talk about our company, which at the time operated 143 jewelry stores nationwide (more than 245 now). Personally, I felt uncomfortable expanding the company beyond my ability to know every store manager on a first-name basis. We had grown well beyond that point, and we were still growing. We had no interest in going public. We didn't want to be pressured to pay more attention to quarterly earnings and stock price than to the long-term operational health of the company and the well-being of our associates.

We certainly didn't want some financial butcher carving up this jewel and selling it piecemeal. I also didn't want my associates spitting on my grave.

As the woman said her goodbyes and turned to go, and as Buffett prepared to cross the street, I saw my own opportunity, stepped forward and thrust out my hand. "Hello, Mr. Buffett," I said. "I'm Barnett Helzberg of Helzberg Diamonds in Kansas City." I didn't sense any recognition in his face, but he politely

shook my hand and said "Hello" back, willing, if not eager, to hear me out. Then, right there on the sidewalk, as busy New Yorkers

rushed past us and street traffic buzzed around us, I told one of the most astute businessmen in America why he ought to consider buying our family's 79-year-old jewelry business, headquartered in North Kansas City, Missouri. "I believe that our company matches your criteria for investment," I said. To which he replied, simply, "Send me the information. It will be confidential."

My conversation with Buffett lasted no more than half a minute. (In fact, the account of my sidewalk pitch to Buffett was featured in the January 2002 issue of Harvard Management Communication Letter as an example of the classic elevator pitch, which entails selling your idea in the time it takes to ride an elevator three stories.) My idea, of course, was to grab his attention. How often do you encounter Warren Buffett on a sidewalk and pique his curiosity in your family company?

As I walked away, however, I wondered whether my approach might have seemed abrupt, if not downright presumptuous. Yet, I felt certain that our successful, three-generation family business made a perfect fit with Buffett's Berkshire Hathaway, which Fortune magazine has repeatedly named as one of the 10

most respected companies in America. In 1994, Berkshire's $11.9 billion net worth was greater than Coca-Cola and Pepsico combined. It was a collection of 30 businesses including such signature names as See's Candy, World Book, and Nebraska Furniture Mart. It was the largest shareholder in Gillette, Coca-

Cola, and the American Express Company. To be sure, if you're looking for a gauge to measure how well your company has grown and developed, and how well

your management has led and cared for your company's associates, you can't do any better than to find yourself in a situation where Warren Buffett wants to buy it. And that's just the situation in which we found ourselves in 1994. Imagine our gut-busting pride when, as the third-generation owners of Helzberg, Buffett later explained why he decided to buy our business: "We associate ourselves with some real jewels of the American business world. And I think it's quite fitting

that Helzberg joins this collection of jewels. It's just exactly the kind of company we like to invest in. It's got outstanding management. It's got a leadership position. It's on the move. I would hate to compete with you fellows. I'd rather be on your side of the fence. And that's the side we're going to be on."

My dream buyer for the family business all along was Warren Buffett. I knew we could trust him to keep the headquarters in Kansas City, resist changing the company's character, and retain the jobs of all of Helzberg's associates. It might have been simpler to sell to the highest bidder, but that notion seemed as sensible as choosing a brain surgeon based on the lowest price rather than on talent and reputation.

I had purchased four shares of Berkshire Hathaway stock in 1989 just so I could attend Berkshire's annual meetings and pick up some of Buffett's wisdom. His presentations are warm and unpretentious. He genuinely enjoys people. He's often quoted saying, "Great people do great things." He also likes to say, "We only buy companies that we trust." That certainly proved to be true when he bought Helzberg Diamonds. My first visit to a Berkshire Hathaway annual meeting was

quite a revelation and taught me a great deal about Warren Buffett and his philosophies. My notes included, "Hire seven footers, that is, hire people with incredible abilities." Another very, very strong impression was obtained through an answer he gave a Kellogg Business School student who asked, "How do I determine which job to take?" Warren's answer was simply, "Get a job you love, at a company you respect!" His people orientation was obvious and since I had been taught from day one by my Dad that "Business is people," this was most impressive.

Buffett recounted the story of how he acquired our company to shareholders this way: "Barnett said he had a business we might be interested in. When people say that, it usually turns out they have a lemonade stand with potential, of course, to quickly grow into the next Microsoft. So I simply asked Barnett to send me particulars. That, I thought to myself, will be the end of that." In fact, it did almost end there. I promptly went home and sent Buffett nothing, afflicted with hang-ups about confidentiality. I'm the kind of guy who asks for someone's Social Security number before I tell them the time. But one night I reread the chairman's letter in the Berkshire annual report. There was Buffett again inviting companies that meet his acquisition criteria to send him information, and he would "promise

complete confidentiality." While shaving the next morning, I looked at the slow learner in the mirror and began to scold myself for procrastinating. "He told you in person it would be confidential. He told you in writing. Do you want it set to music? Send him the information." So I finally did.

Not long after we sent Buffett our financial information, he called us up and told us he wanted to talk. He said we were a lot like Berkshire, which to me was the ultimate compliment. Soon we were in his office in Omaha negotiating a sale. His incredible diplomacy was strongly evident during our visit. Our CPA from Deloitte & Touche told him the incredibly high price that we had come up with for the business, based on what he had paid for another company. I recall he had no reaction even though it was actually about double the price that he ultimately paid. I am sure Mr. Buffett and I both thought it was ridiculously high!

"This can be the fastest deal in history," Buffett said. "But what about due diligence?" I asked, surprised at how fast the negotiations were moving. Most suitors demand to see every scrap of paper you've ever generated and to interview every top manager. That wasn't Buffett's way. "I can smell these things,"

Buffett said. "This one smells good." That would not be my last surprise. I asked about a noncompete clause. "You'll certainly want that, won't you?" I

asked. Buffett shrugged. "You wouldn't do anything to hurt this company," he said. When a guy says that to you, he has you on your honor for the rest of your life.

When Buffett buys a company, he's not looking for a quick resale to make a buck. He told us, "Someone asked one time what my favorite holding period for securities is and I said forever. And that's exactly the way we feel about our businesses." When we were ready to leave his office and asked if a cab

could be called, he insisted on walking us to the elevator, riding it down with us, and standing on the street to wait with us for the cab. Typical Buffett treatment! Our poor cab driver was desperate to know what company we were with. I finally fibbed and said we were with a hardware retailer.

Warren Buffett's approach to purchasing companies is very straightforward. He will give an answer immediately if he has any interest, and he will immediately give you a non-negotiable price.

A close friend whose company he bought was told by his attorney that there are seven things the attorney puts in every acquisition contract on behalf of a client who is to be acquired. When Berkshire purchased my friend's business, he requested none of these because they were already in the contract. That tells one

a great deal about the character of Warren Buffett. His is a vitally important role model in the landscape of American business, proving that nice guys can finish first (or second after Bill Gates!). After buying Helzberg, Buffett explained to his shareholders that "our ownership structure enables sellers to know that when

I say we are buying to keep, the promise means something. For our part," he continued, "we like dealing with owners who care what happens to their companies and people. A buyer is likely to find fewer unpleasant surprises dealing with that type of seller than with one simply auctioning off his business."

Easy to say, but Buffett makes it work. How? By buying companies with smart and intuitive leaders and then staying out of their way. When he bought us, Buffett's empire of 22,000 associates was overseen by only 11 people at his Omaha headquarters.

No micromanagement there. And talk about trust. Explaining how he makes this hands-off approach work, Buffett said that it was "because the managers operate with total autonomy and they do such a terrific job we really don't need anyone to supervise them. Managers run their own shows.

They don't have to report to central management," he said. "When we get somebody who is a .400 hitter we don't start telling them how to swing."

True to his word, Buffett didn't change a hair in the leadership of Helzberg. He was happy with the company's leadership under Jeff Comment, formerly president of Wanamaker's. "Jeff was our kind of manager," Buffett would later say, adding, "In fact, we would not have bought the business if Jeff had not been

there to run it. Buying a retailer without good management is like buying the Eiffel Tower without an elevator."

Buffett's purchase of Helzberg Diamonds validated the painstaking efforts by our family, along with so many wonderful associates, to build a national operation of profitable customer focused jewelry stores second to none for providing quality, value, and service. The national recognition of our efforts was

flattering. In a November 1994 industry report, Goldman Sachs called Helzberg Diamonds the "Nordstrom of the Jewelry Business."

The report noted that Helzberg's average per-store sales of more than $1.7 million in 1994 was nearly double the industry average. Goldman Sachs said Helzberg set the standard of excellence for other jewelers in its market niche, selling to middle and upper-middle-class consumers. The report concluded that just as other department stores have had to learn to compete with Nordstrom, so other credit jewelry companies will develop strategies to compete effectively with Helzberg.

Berkshire was then one of about a dozen companies in the United States that had a AAA rating from Standard and Poor's.

Buffett told us after our negotiations, "You are associated with a company that is really regarded as one of the bluest of blue chips. And in associating with Helzberg's we know we have joined with another company that, in its own field, is comparably regarded." I couldn't think of a more gracious thing to say.

I think if my Dad, Barnett Sr., and grandfather, Morris, had still been alive, they too would feel proud and comfortable that our family business, which started in 1915 from a single store in Kansas City, Kansas, and had grown by 1994 into a group of 143 stores in 23 states, with total sales of $282 million, was in capable hands. As Buffett himself finally described the deal that began on a New York sidewalk, "We weren't talking lemonade stands."

Mining for Diamonds. Dad told us that the higher you go, the nicer they get. Mr.Buffett exemplifies that rule. Consider using fair contracts rather than one where the other party thinks you are playing "gotcha." Berkshire does.. Class and business success are not mutually exclusive. For a priceless educational opportunity buy one share of Berkshire Hathaway B stock so after you get the annual report (available on the web to all), you can go to the annual meeting (for shareholders only). Some claim that one Berkshire meeting is more valuable than a semester-long MBA class.

Selling to the World's Best Investor

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