Warren Buffett (Trades, Portfolio)'s conglomerate, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), only buys companies that the Oracle of Omaha considers to be great businesses. This goes for both its public and private portfolios.
As such, I think studying Berkshire's private business acquisitions can give us a fascinating insight into the sorts of companies that Buffett believes are good businesses and the qualities he looks for in these operations.
Berkshire and Van Tuyl
In 2014, Berkshire agreed to buy auto group Van Tuyl. In an interview in 2014, Larry Van Tuyl, the then CEO of the business, said that he decided to sell to Berkshire because he wanted to keep the company's culture, and there was "only one" buyer that he believed would be able to keep the firm's culture and corporate values.
Buffett also commented on the deal at the time, saying, "it's something that we will want to own for 100 years." He went on to add, "It's the kind of business we can expand a lot, because there's 17,000 dealers in the country and we're buying 78 of them."
Buffett offered some more color of the benefits of the business at the 2015 Berkshire annual meeting. When asked about the longevity of the business, he replied:
"Van Tuyl will adapt to what the customer wants. We'll see how some of these experiments go. And I don't think there would be any problem at all if the world goes in that direction and Van Tuyl going with it. But I wouldn't be surprised if five or ten years from now the system is pretty much the same. I wouldn't be totally surprised if it changes, either, but I can't predict the outcome. I can predict that Van Tuyl, and the subsequent auto dealerships we buy, I can predict that they will be a very important part of Berkshire and I think will be quite profitable in relation to the capital we employ in the business."
Later on in the Q&A session, Buffett stated that he did not believe there were any huge economies of scale to be had from operating tens of thousands of auto dealers across the country. "Running dealerships is a very good business," he stated, and there was no need to make it better.
He also noted that the Van Tuyl business was managed by competent dealers who had the "right incentives" in place. It was a system of meritocracy, Charlie Munger (Trades, Portfolio) noted, "where the right people get the power and get some ownership."
All in all, it seems that four main qualities attracted Buffett to this business in the first place.
At the top, the company's culture was in the right place. Secondly, Buffett believed that the business was profitable and he could earn a good return on invested capital. Thirdly, the company had a long runway for growth as it was still a tiny part of a large sector. And finally, Buffett mentioned that the auto dealing industry goes through up and down years. In down years, single operator dealers might be more open to selling at a lower price to a cash buyer. Berkshire would be able to take advantage of this.
Granted, Berkshire had several advantages in its corner that were not available to other companies. For example, not many businesses can deploy large amounts of capital in down markets.
Still, it's clear what Buffett was looking for from this investment. Van Tuyl was a highly profitable business that had the potential to grow its footprint multiple times over the next few years in a market that would be unlikely to change. These are just the sort of stable, highly cash generative businesses Berkshire has always been interested in.
Disclosure: the author does not own any share mentioned.
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