At the dawn of the 1960s a young man from Omaha, Nebraska began aggressively purchasing shares in a failing textile manufacturing company by the name of Berkshire Hathaway (BRK.A, BRK.B). His name was Warren Buffett, and he became Berkshire's largest shareholder within two years of acquiring his initial stake in the company. Fast-forward to more than 50 years after that initial investment, and Berkshire Hathaway has evolved from a struggling business into one of the world’s largest and most diverse conglomerates. With a $508 billion market capitalization as of November 2, 2018 market close, the company owns hundreds of businesses operating in financial services, consumer goods, oil and gas, agriculture, and transportation.
Buffett began to divest Berkshire's interest in textiles shortly after he became the company's largest shareholder. He initially used the company’s funds to purchase lucrative insurance companies, hoping that the extra money could help fund future investments and acquisitions. If Berkshire Hathaway's stock price is any indication, Buffett's bet paid off. Between 1964 and 2017 Berkshire Hathaway's shares have returned a 20.9 percent compound annual rate. To put that into perspective, the Standard & Poor's 500 Index (S&P 500) has returned a 9.9 percent compound annual rate during the same period.
Although Berkshire Hathaway is a major shareholder in numerous publicly traded companies including Apple (AAPL), American Express (AXP), and Coca-Cola (KO), the multinational conglomerate also owns a portfolio of privately held companies as well. In fact, Berkshire Hathaway has more than 50 wholly-owned subsidiaries that in turn own another 200 subsidiaries.
Warren Buffett: InvestoTrivia Part 1
Here are the stories behind Berkshire Hathaway's most well-known companies.
With more than 13 million policyholders across the United States, the Government Employees Insurance Company (GEICO) is the automotive insurance company responsible for the slogan "15 Minutes Could Save You 15% or More on Car Insurance." As of October 18, 2018, the company insures more than 27 million vehicles on the road. Founded in 1936 by Leo Goodwin, GEICO originally targeted its products to employees of the federal government. Goodwin believed that there would be a lot less risk in insuring government workers than the general public. After being acquired by Berkshire Hathaway in 1996, the company began to market its insurance policies to individuals who were outside of the public sector.
Each year GEICO spends a tremendous amount of money on advertising. For example, $1.1 billion or 6.8% of the company's revenue in 2012 was spent on marketing. In 2013, GEICO upped the ante, along with its advertising budget, reportedly spending $1.18 billion that year and becoming the fifth most advertised brand in any industry. By comparison, State Farm spent only $802.8 million on advertising in 2013. Unlike most insurance providers, GEICO sells its policies directly to its consumers on mobile and desktop devices. This model eliminates the expensive cost of paying commissions to insurance agents.
Dairy Queen, a popular fast food chain, is another subsidiary of Berkshire Hathaway. The franchise was acquired in 1997 for $585 million in both cash and Berkshire Hathaway common stock. As of November 2018, Dairy Queen operates 4,503 stores in the U.S. and another 2,552 locations internationally.
Benjamin Moore Paints
Benjamin Moore & Co., an American premium paint manufacturer joined the Berkshire Hathaway empire in November 2000. The company was founded in 1883 with just $2,000 in capital by Benjamin and Robert Moore, two brothers from Brooklyn, New York. Berkshire acquired the company for $2 billion.
In 1964, two U.S. Air Force Generals by the names of Curtis LeMay and Paul Tibbets founded Executive Jet Aviation, one of the first private business jet charter and management companies in the world. Less than a decade later, Executive Jet Aviation was serving approximately 250 clients with a fleet that flew more than 3 million miles each year.
In 1984, Executive Jet Aviation was acquired by Richard Santulli, a former executive at Goldman Sachs (GS), who subsequently changed the company's name to NetJets. Around that time the company introduced a new initiative to the aviation industry called fractional aircraft ownership. The program allowed customers of NetJets to purchase an equity stake in an aircraft with multiple owners. Fractional aircraft ownership allowed NetJets customers to have the benefits of owning a private jet while sharing the costs that come with acquiring and maintaining one. Berkshire Hathaway became a client of NetJets in 1995 and later acquired the company in 1998.
Duracell is one of the most popular battery brands globally with a history that dates back to the 1920s. Since its founding, the battery producer has undergone a number of mergers and acquisitions. In 2014, Berkshire Hathaway announced that it would be purchasing the company from Procter & Gamble (PG) for $4.7 billion. The transaction was financed by what is known as a split-off. That means that instead of paying with cash, Berkshire exchanged its equity stake in Procter & Gamble for the Duracell subsidiary. The deal was finalized in early 2016.
Fruit of the Loom
Headquartered in the state of Kentucky, Fruit of the Loom is one of the country’s largest clothing manufacturers. Fruit of the Loom was founded in 1851 by a New England industrialist named Robert Knight. In the 1990s, the company experienced a series of financial difficulties that led to its filing for Chapter 11 bankruptcy protection in 1999. This resulted in huge losses for the company’s shareholders. From the beginning of 1997 to the spring of 2000, Fruit of the Loom’s stock price fell from $44 to $1 per share. Always on the lookout for bargains, Buffett and his team at Berkshire Hathaway began negotiating a possible acquisition of the company in 2001. In November of that year, Berkshire announced that it would be purchasing the company for $835 million in cash. The transaction was finalized in April 2002.
The Bottom Line
Berkshire Hathaway is an investment powerhouse more than 50 years in the making. Under Buffett's management, many Berkshire shareholders became billionaires or near-billionaires. As of November 2018, Berkshire Hathaway ranked third on Fortune magazine's Global 500 List by annual revenue.