Warren Watch: A family trait

Omahan Judy Newton perked up when she read a World-Herald story inviting readers to send greetings to Warren Buffett for his 80th birthday, which was Monday.

Why not send him a copy of an interesting bit of family memorabilia?

She mailed to us a copy of a letter that Buffett’s grandfather, grocer Ernest Buffett, had sent to her great-grandmother, Mrs. Andrew Anderson. We forwarded the copy of the letter to Buffett’s office.

“I thought it said something about his business practices,” Newton said.

Her great-grandmother was moving from Dundee to South Omaha, and in those days you shopped mainly at your neighborhood grocery. A move across town meant leaving behind your previous merchants.

Ernest Buffett’s letter was typed but signed by him.

Dear Madam:

We could hardly feel that we had fulfilled our obligation to you until we had written and told you how much we have appreciated your trade since we came to Dundee.

We want to thank you for the patronage that you have given us and to say that you have been one of the most appreciative and loyal customers we have had. We certainly regret your leaving Dundee as we have always found it a pleasure to serve you.

Again thanking you, I am

Your very truly,

Ernest Buffett

He enclosed a receipt showing Mrs. Anderson’s account was paid up.

Newton said her family still owns the Anderson house near 33rd Street and Hoctor Boulevard, although it’s for sale. She came across the letter among other family souvenirs when a cousin died.

“It meant something to them to have kept it all those years,” she said. “It was a personal relationship.”

The date on the letter was Nov. 3, 1919, more than 10 years before Warren Buffett’s birth.

Plans for Wesco

Buffett gave more details last week about his plan to acquire the remainder of Wesco Financial Corp., the California investment company headed by his longtime business partner, Charlie Munger. Berkshire already owns 80.1 percent of Wesco’s stock.

In a letter to Wesco’s board of directors, Buffett described how Berskhire would calculate a price for the shares it doesn’t already own. He said he expects the board to appoint a special committee to consider the offer, and approval of the sale would require a majority vote by the minority shareholders.

“But if the special committee or holders of a majority of the non-Berkshire-owned shares of Wesco disagree with our evaluation, there will be no hard feelings on our part,” he wrote, adding:

“Wesco will continue as an 80.1 percent-owned subsidiary of Berkshire, and will operate as it does presently. It will have the same relationships with Berkshire that it enjoys today, with its present management working to increase its value in a manner that benefits equally both Berkshire and public shareholders.”

Going against the norm

Warren Buffett in a beauty pageant? Waving his arms at a corporate auction? Buying a money-losing insurance company?

Doesn’t sound realistic, but that’s what newspapers in Scotland and England have reported.

The Independent of London, the Scotsman of Edinburgh and other newspapers carried reports that Berkshire Hathaway Inc. of Omaha, of which Buffett is chairman and CEO, may buy Direct Line, the property insurance division of the Royal Bank of Scotland.

Berkshire hasn’t commented on the report. The Royal Bank declined to identify possible buyers but said it talked with potential advisers about the sale or about possibly selling more stock in the company.

Elements of the alleged deal are distinctly un-Berkshireish.

The European Commission has ordered the Royal Bank, which received government bailout money, to sell Direct Line by 2013 to improve its finances and buy back some of the taxpayers’ 83 percent ownership.

The Independent said Berkshire and Allstate Insurance took part in a “beauty parade” last month of potential buyers.

Direct Line could be purchased for a “knock-down price,” the Independent said, which would appeal to Berkshire but also might attract lots of other buyers.

In general, Buffett has said he doesn’t take part in auctions to buy companies. If you want to sell, he says, let him know and quote him a price, and he’ll give you a quick yes or no.

Direct Line, which employs 16,000 people, lost about $350 million last year, partly because of a big boost in auto damage claims thanks to rule changes.

Buffett has said he can’t rescue money-losing businesses and needs excellent managers already on board, but he can live with “lumpy” financial results if long-term prospects are good.

But there are some factors that could tip Berkshire toward a purchase.

The Omaha company already has substantial interests in European insurance. Potential efficiencies from combining Direct Line with other operations might add value for Berkshire.

The purchase also would be huge, and there are few such deals these days for Buffett to consider.

Berkshire has had limited dealings with the Scottish bank. In 2008 Berkshire offered to rescue Constellation Energy of Baltimore from a financial crunch over concerns that the Royal Bank and another creditor would cancel Constellation’s credit line.

A French financial group bid higher and won the deal, with Berkshire getting a big payment letting the transaction go.

Earlier that year the Royal Bank helped Belgian brewer InBev SA buy Anheuser-Busch for about $46 billion. Berkshire was Busch’s second-largest shareholder.

Derivatives plan backed

Analyst Ben Comston wrote on seekingalpha.com that some observers have criticized Buffett’s decision to sign derivative contracts that will pay off for buyers if major stock market indexes decline over a period of several years. Comston makes the case that Buffett’s decision was shrewd.

Comston calculated that for the risk Berkshire has assumed, the other parties should have paid a “fair premium” of between $500 million and $2 billion. But they actually paid Berkshire $4.9 billion, which Buffett invests or uses for other business purposes while the years-long contracts are in effect.

“But when the last contract is settled it will very likely be seen that Berkshire cleaned house on its equity derivatives.”

‘Cementing a legacy’

Stephen Foley wrote for the Independent of London that Buffett apparently had his ego removed at a young age and remains “as cheerfully good-hearted, funny and self-deprecating as ever — so much so, in fact, that it is easy to miss just how significant a figure he is in the history of American business.”

Buffett’s reputation is as strong as ever, and he is “cementing a legacy that will live for generations,” Foley wrote.

Key elements in that legacy:

Creating the fourth-largest company in America; educating generations of investors; proving that human relations matter in business; helping to rescue the world economy in 2008 with his investments and words of encouragement; and raising the bar for philanthropy.

Contact the writer:

444-1080, steve.jordon@owh.com

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