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Buffett Partnership Letter Series – 1960 (Part 2)

November 06, 2012 | About:
Part 2 of the 1960 partnership letter, written by Warren Buffett, describes the partnership’s investment in Sanborn Map.

Before we take a look at the 1960 letter, I want to jump back to the 1958 and 1959 letters. In these letters, Buffett alludes to a large investment, and in the 1960 partnership letter we find out that this large investment is Sanborn Map.

Here’s what the 1958 letter says about the Sanborn Map investment:

Late in the year we were successful in finding a special situation where we could become the largest holder at an attractive price, so we sold our block of Commonwealth obtaining $80 per share although the quoted market was about 20% lower at the time.

...This new situation is somewhat larger than Commonwealth and represents about 25% of the assets of the various partnerships. While the degree of undervaluation is no greater than in many other securities we own (or even less than some) we are the largest stockholder and this has substantial advantages many times in determining the length of time required to correct the undervaluation. In this particular holding we are virtually assured of a performance better than that of the Dow-Jones for the period we hold it.
And here’s what the 1959 letter says about Sanborn Map:

Last year, I mentioned a new commitment which involved about 25% of assets of the various partnerships. Presently this investment is about 35% of assets. This is an unusually large percentage, but has been made for strong reasons. In effect, this company is partially an investment trust owing some thirty or forty other securities of high quality. Our investment was made and is carried at a substantial discount from asset value based on market value of their securities and a conservative appraisal of the operating business.

We are the company’s largest stockholder by a considerable margin, and the two other large holders agree with our ideas. The probability is extremely high that the performance of this investment will be superior to that of the general market until its disposition, and I am hopeful that this will take place this year.
With that background, let’s look at Buffett’s full treatment of the Sanborn Map investment in the 1960 letter.

Sanborn Map:

Last year mention was made of an investment which accounted for a very high and unusual proportion (35%) of our net assets along with the comment that I had some hope this investment would be concluded in 1960. This hope materialized. The history of an investment of this magnitude may be of interest to you.

Sanborn Map Co. is engaged in the publication and continuous revision of extremely detailed maps of all cities of the United States. For example, the volumes mapping Omaha would weigh perhaps fifty pounds and provide minute details on each structure. The map would be revised by the paste-over method showing new construction, changed occupancy, new fire protection facilities, changed structural materials, etc. These revisions would be done approximately annually and a new map would be published every twenty or thirty years when further pasteovers became impractical. The cost of keeping the map revised to an Omaha customer would run around $100 per year.

This detailed information showing diameter of water mains underlying streets, location of fire hydrants, composition of roof, etc., was primarily of use to fire insurance companies. Their underwriting departments, located in a central office, could evaluate business by agents nationally. The theory was that a picture was worth a thousand words and such evaluation would decide whether the risk was properly rated, the degree of conflagration exposure in an area, advisable reinsurance procedure, etc. The bulk of Sanborn's business was done with about thirty insurance companies although maps were also sold to customers outside the insurance industry such as public utilities, mortgage companies, and taxing authorities.

For seventy-five years the business operated in a more or less monopolistic manner, with profits realized in every year accompanied by almost complete immunity to recession and lack of need for any sales effort. In the earlier years of the business, the insurance industry became fearful that Sanborn's profits would become too great and placed a number of prominent insurance men on Sanborn's board of directors to act in a watch-dog capacity.

In the early 1950’s a competitive method of under-writing known as "carding" made inroads on Sanborn’s business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930's to under $100,000 in 1958 and 1959. Considering the upward bias in the economy during this period, this amounted to an almost complete elimination of what had been sizable, stable earning power.

However, during the early 1930's Sanborn had begun to accumulate an investment portfolio. There were no capital requirements to the business so that any retained earnings could be devoted to this project. Over a period of time, about $2.5 million was invested, roughly half in bonds and half in stocks. Thus, in the last decade particularly, the investment portfolio blossomed while the operating map business wilted.

Let me give you some idea of the extreme divergence of these two factors. In 1938 when the Dow-Jones Industrial Average was in the 100-120 range, Sanborn sold at $110 per share. In 1958 with the Average in the 550 area, Sanborn sold at $45 per share. Yet during that same period the value of the Sanborn investment portfolio increased from about $20 per share to $65 per share. This means, in effect, that the buyer of Sanborn stock in 1938 was placing a positive valuation of $90 per share on the map business ($110 less the $20 value of the investments unrelated to the map business) in a year of depressed business and stock market conditions. In the tremendously more vigorous climate of 1958 the same map business was evaluated at a minus $20 with the buyer of the stock unwilling to pay more than 70 cents on the dollar for the investment portfolio with the map business thrown in for nothing.

How could this come about? Sanborn in 1958 as well as 1938 possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars. Despite “carding” over $500 million of fire premiums were underwritten by “mapping” companies. However, the means of selling and packaging Sanborn’s product, information had remained unchanged throughout the year and finally this inertia was reflected in the earnings.

The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the need for rejuvenation of the map business. Sanborn had a sales volume of about $2 million per year and owned about $7 million worth of marketable securities. The income from the investment portfolio was substantial, the business had no possible financial worries, the insurance companies were satisfied with the price paid for maps, and the stockholders still received dividends. However, these dividends were cut five times in eight years although I could never find any record of suggestions pertaining to cutting salaries or director's and committee fees.

Prior to my entry on the Board, of the fourteen directors, nine were prominent men from the insurance industry who combined held 46 shares of stock out of 105,000 shares outstanding. Despite their top positions with very large companies which would suggest the financial wherewithal to make at least a modest commitment, the largest holding in this group was ten shares. In several cases, the insurance companies these men ran owned small blocks of stock but these were token investments in relation to the portfolios in which they were held. For the past decade the insurance companies had been only sellers in any transactions involving Sanborn stock.

The tenth director was the company attorney, who held ten shares. The eleventh was a banker with ten shares who recognized the problems of the company, actively pointed them out, and later added to his holdings. The next two directors were the top officers of Sanborn who owned about 300 shares combined. The officers were capable, aware of the problems of the business, but kept in a subservient role by the Board of Directors. The final member of our cast was a son of a deceased president of Sanborn. The widow owned about 15,000 shares of stock.

In late 1958, the son, unhappy with the trend of the business, demanded the top position in the company, was turned down, and submitted his resignation, which was accepted. Shortly thereafter we made a bid to his mother for her block of stock, which was accepted. At the time there were two other large holdings, one of about 10,000 shares (dispersed among customers of a brokerage firm) and one of about 8,000. These people were quite unhappy with the situation and desired a separation of the investment portfolio from the map business, as did we.

Subsequently our holdings (including associates) were increased through open market purchases to about 24,000 shares and the total represented by the three groups increased to 46,000 shares. We hoped to separate the two businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the map business. There appeared to be a real opportunity to multiply map profits through utilization of Sanborn's wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.

There was considerable opposition on the Board to change of any type, particularly when initiated by an outsider, although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton (Management Experts). To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue-chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the plan. About 72% of the Sanborn stock, involving 50% of the 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $1 ¼ million in government and municipal bonds as a reserve fund, and a potential corporate capital gains tax of over $1 million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate.

Necessarily, the above little melodrama is a very abbreviated description of this investment operation. However, it does point up the necessity for secrecy regarding our portfolio operations as well as the futility of measuring our results over a short span of time such as a year. Such control situations may occur very infrequently. Our bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected along with investment in special situations where the profit is dependent on corporate rather than market action. To the extent that partnership funds continue to grow, it is possible that more opportunities will be available in “control situations.”


Here is my attempt to briefly summarize the Sanborn Map investment:

  • Sanborn Map is a story about a once-vibrant map business. Sanborn’s detailed maps were mainly of use to fire insurance underwriting departments. In the early years of this map business (because it “operated in a more or less monopolistic manner”), the insurance industry put a number of insurance men on Sanborn’s board of directors to “act in a watch-dog capacity.” In the 1930s, Sanborn began accumulating an investment portfolio with its retained earnings; over time, this portfolio grew to be substantial in size. In the 1950s, however, “a competitive method of underwriting known as ‘carding’ made inroads on Sanborn’s business and after-tax profits of the map business fell.” It was in late 1958 that Buffett began purchasing shares in Sanborn Map for the partnership. At this point in time, the market price of the stock only valued Sanborn’s investment portfolio at around 70 cents on the dollar -- with the still-profitable map business thrown in for free. Buffett stated that the partnership “hoped to separate the two businesses [investment portfolio and map business], realize the fair value of the investment portfolio and work to re-establish the earning power of the map business.” However, there was “considerable opposition on to the Board to any type of change.” In the end, to avoid a proxy fight and time delay, a plan was developed to allow shareholders to exchange their stock for “portfolio securities at fair value.” The partnership opted for this exchange and exited the investment.
Here are some general thoughts about the Sanborn Map story/investment:

  • Sanborn Map shows us that a business that operates “in a more of less monopolistic manner” can lose its competitive positioning if it is not vigilant. “Carding” made inroads on Sanborn’s business, and Sanborn did not update the way that it sold and packaged information. This led to a decline in after tax profits. According to Buffett, this decline in profit (over the time period mentioned in the letter) “amounted to an almost complete elimination of what had been sizable, stable earning power.” This is a cautionary tale for all operating businesses that think that competition can’t touch them.
  • To maximize the value of a business, it’s important to focus on the individual components of that business and not just overall results. The income from Sanborn’s investment portfolio masked the lackluster performance of the map business. Buffett states: “The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the need for rejuvenation of the map business.” However, to get full value out of Sanborn Map, the map business needed to be addressed separately from the investment portfolio.
  • In 1958, Sanborn’s map business was probably not worth the reproduction cost of its detailed map assets (assuming no change in how the business was being operated). Buffett states: “Sanborn in 1958 as well as 1938 possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars.” So, the reproduction cost of the detailed map assets was “tens of millions of dollars.” Additionally, Buffett states: “…after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930’s to under $100,000 in 1958 and 1959.” So the question is: Does under $100,000 in after-tax profits in 1958 support a value of “tens of millions of dollars”? I think the answer is no. If we are conservative and assume that after tax profits equal $100,000 and reproduction cost equals $10 million, we end up with a return of 1% per year. So, if you were to assume that intrinsic value was equal to reproduction cost, you would essentially be saying that a return of 1% per year was an appropriate return for this map business. However, in 1958, the 10-year U.S treasury bond rate was a little above 3% (over 3 times higher than Sanborn’s return). Thus, I think it’s fair to say that Sanborn’s map earnings in 1958 probably did not justify an intrinsic value equal to the reproduction cost of its detailed map assets.
  • Conflicts of interest contributed to a decline in Sanborn’s map business. From Buffett’s letter, it sounds as though the insurance men on the board of directors acted in accordance with their own self interests and those of the insurance industry (and not in the interests of Sanborn’s shareholders).
What were the interests of the insurance men on the board? Buffett states, “In the earlier years of the business, the insurance industry became fearful that Sanborn's profits would become too great and placed a number of prominent insurance men on Sanborn's board of directors to act in a watch-dog capacity.” So, they were probably on the board to keep Sanborn’s profits to a minimum (which is exactly what every shareholder wants to hear).

Let’s take a look at the composition of the board, and the amount of stock owned by the board members.

Prior to Buffett’s entry on the board of directors, there were 14 directors. Nine of these directors were “prominent men from the insurance industry who combined held 46 shares of stock out of 105,000 shares outstanding.” For those of you doing the math in your head, these nine directors from the insurance industry, as a group, owned 0.044% (46/105,000) of the outstanding stock of Sanborn – yet they made up 64% (9/14) of the board. Buffett also notes about these nine directors: “Despite their top positions with very large companies which would suggest the financial wherewithal to make at least a modest commitment, the largest holding in this group was ten shares. In several cases, the insurance companies these men ran owned small blocks of stock but these were token investments in relation to the portfolios in which they were held. For the past decade the insurance companies had been only sellers in any transactions involving Sanborn stock.” So, these nine directors from the insurance industry (and their insurance companies) were not heavily invested in Sanborn Map, yet they effectively controlled the board.

Of the remaining five directors, four recognized the problems with the map business: a banker (who owned 10 shares, actively pointed out the company’s problems, and later added to his holdings), two top officers of Sanborn (who owned about 300 shares combined, but were kept in a subservient role by the board), and the son of a deceased president of Sanborn (whose widowed mother owned about 15,000 shares of stock). The last director was the company attorney (who owned 10 shares).

Buffett’s letter implies that the insurance men on the board, with an almost two-thirds majority, did not act in the best interests of the shareholders. Instead, they protected their own interests and those of the insurance industry. Let’s take a look at some of the actions of this board (controlled by insurance men):
  • Sanborn’s board of directors resisted making changes of any kind to the map business, even though four directors (a banker, two top officers of Sanborn, and a son of a deceased president of Sanborn) were in favor of trying to improve the map business.
  • In 1958, Sanborn’s board accepted the resignation of the son of the deceased president (after the board turned him down for the top position in the company – a position he sought because he was “unhappy with the trend of the business”). While it is uncertain as to whether or not the son was qualified for the top post at Sanborn, it does give the appearance that the controlled board was not willing to give the top company position to someone who wanted to change/improve the map business. And remember, the son probably represented his widowed mother -- and she owned a little over 14% of the common’s stock.
  • Buffett states: “The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the need for rejuvenation of the map business.” The insurance men on the board must have been more than okay with the status quo, because “the insurance companies were satisfied with the price paid for maps.” And while the stockholders still received dividends, “these dividends were cut five times in eight years although . . . [Buffett] could never find any record of suggestions pertaining to cutting salaries or director’s and committee fees.”
  • Buffett notes that “there was considerable opposition on the Board to change of any type, particularly when initiated by an ‘outsider,’ although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton, Management Experts.” So, the majority of the controlled board was opposed to change of any type (even if it was an attempt to reinvigorate the map business). In pursuing the status quo, the controlled board opposed the suggestions/recommendations of large shareholders, management and a professional business consulting firm.
  • Shortly after the son of the deceased president was turned down for the top role at Sanborn (and resigned), the Buffett partnership “made a bid to his mother for her block of stock, which was accepted.” It’s pretty clear that Buffett purchased this large block of stock from a motivated seller. The son of the widow (who owned these 15,000 shares) had just resigned from his seat on the board and no longer had any say regarding the management of Sanborn. This widow might have decided that the situation was hopeless or that it wasn’t worth the trouble. Whatever her reasons, it appears that she wanted out – even if she had to sell at the depressed price prevailing at the time.
  • The Buffett partnership’s goal with the Sanborn investment was “to separate the two businesses [investment portfolio and map business], realize the fair value of the investment portfolio and work to re-establish the earning power of the map business. There appeared to be a real opportunity to multiply map profits through utilization of Sanborn's wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.” Buffett realized that the way to maximize value with the Sanborn investment was to realize the value of the investment portfolio and work to re-establish the earnings of the map business. I think we can infer from this passage that it was worth the effort to try and re-establish the earnings power of the map business. The last sentence in this passage is interesting: Buffett recommends how Sanborn may be able to “multiply map profits,” and it’s by putting the map data in the “most usable form for the customer.” Buffett is saying that Sanborn needs to focus on giving the customer what he/she wants.
  • Buffett states: “To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue-chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out.” I find this passage interesting because Buffett could have won a proxy fight and had the pleasure of seeing many of the insurance men leave the Sanborn board, but that’s not what he did. Buffett wanted to “avoid time delay with a large portion of Sanborn’s money tied up in blue-chip stocks which … [he] didn’t care for at current prices.” So, a plan was created to take out “all stockholders at fair value who wanted out.” Buffett was afraid that the value of the investment portfolio would decline (it must have contained some overvalued securities), and so he did the practical thing. He struck a deal/compromise to avoid time delay. This deal also helped him to realize a profit on his Sanborn stock sooner than he would have otherwise. Obviously, Buffett didn’t get maximum value for his Sanborn stock (i.e. he left a little meat on the bone), but he was able to exit with a nice profit. At the time, this might have been the best choice available to him (given time value of money considerations, current security prices, etc.).
  • Finally, I think it’s noteworthy that the remaining shareholders (i.e., those that didn’t exchange their stock for portfolio securities) were also better off than before the exchange deal. Buffett states: “The map business was left with over $1 ¼ million in government and municipal bonds as a reserve fund, and a potential corporate capital gains tax of over $1 million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate.”
Well, that’s all I have for now. Thanks for reading my general thoughts on Sanborn Map. Next time, we’ll take a closer look at some of the numbers behind the Sanborn investment.

Links to other articles in the Buffett Partnership Series:

Previous article: Buffett Partnership Letter Series – 1960 (Part 1)

Introduction: Buffett Partnership Letter Series

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