Berkshire Hathaway 2015 Annual Report Download - page 8

‹Our Heinz partnership with Jorge Paulo Lemann, Alex Behring and Bernardo Hees more than doubled its
size last year by merging with Kraft. Before this transaction, we owned about 53% of Heinz at a cost of
$4.25 billion. Now we own 325.4 million shares of Kraft Heinz (about 27%) that cost us $9.8 billion. The
new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your
Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite
meal. (We will have the Oscar Mayer Wienermobile at the annual meeting – bring your kids.)
Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us
to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our
Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions
below its market value, an outcome only an accountant could love.
Berkshire also owns Kraft Heinz preferred shares that pay us $720 million annually and are carried at $7.7
billion on our balance sheet. That holding will almost certainly be redeemed for $8.32 billion in June (the
earliest date allowed under the preferred’s terms). That will be good news for Kraft Heinz and bad news for
Berkshire.
Jorge Paulo and his associates could not be better partners. We share with them a passion to buy, build and
hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing
this goal.
Their method, at which they have been extraordinarily successful, is to buy companies that offer an
opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will
get the job done. Their actions significantly boost productivity, the all-important factor in America’s
economic growth over the past 240 years. Without more output of desired goods and services per working
hour – that’s the measure of productivity gains – an economy inevitably stagnates. At much of corporate
America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his
associates.
At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow
an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by
cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in
which these CEOs – and their eventual successors, who typically are like-minded – can maximize both
their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am
heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to
marry someone with the intent of changing their behavior.”)
We will continue to operate with extreme – indeed, almost unheard of – decentralization at Berkshire. But
we will also look for opportunities to partner with Jorge Paulo, either as a financing partner, as was the
case when his group purchased Tim Horton’s, or as a combined equity-and-financing partner, as at Heinz.
We also may occasionally partner with others, as we have successfully done at Berkadia.
Berkshire, however, will join only with partners making friendly acquisitions. To be sure, certain hostile
offers are justified: Some CEOs forget that it is shareholders for whom they should be working, while other
managers are woefully inept. In either case, directors may be blind to the problem or simply reluctant to
make the change required. That’s when new faces are needed. We, though, will leave these “opportunities”
for others. At Berkshire, we go only where we are welcome.
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