The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [170]
In January 1966, Gottesman had brought Buffett an idea: Hochschild-Kohn, a venerable department store headquartered in a building a city block in size that sat at an intersection in downtown Baltimore. Although it was kitty-corner to three competitors—Hutzler’s, Hecht Co., and Stewart’s—all four stores had prospered since the times when ladies donned hats and gloves and rode the streetcar downtown to spend all day shopping and having lunch. The well-regarded Hochschild-Kohn sold apparel, home furnishings, and housewares. Its proprietors, the Kohn family, drove old cars and lived modestly—just the kind of people Buffett liked.
Martin Kohn, the company’s CEO, had called Gottesman to tell him that several branches of the family were thinking of selling and would probably accept a discount price. The Kohns “took enormous pride in this store,” says Gottesman, “but if it had a good dress department, they never bought a dress there. It was too expensive for them.”
When Charlie Munger was in Omaha, he, Buffett, and Gottesman usually played a lot of golf, and they’d sit at the grill at the Omaha Country Club drinking pitchers of iced tea, talking stocks, and kidding around. But although they liked the same kind of stocks, the three had never partnered on a deal. This time, Gottesman called Buffett and told him the part about Hochschild-Kohn’s discount price and the Kohns’ parsimony, and Buffett got hooked. He owned no other retailing stock besides a little F. W. Woolworth. Department stores rose and fell on fashion and customer tastes; he knew as much about that as how to bake a soufflé.
He wanted Munger, to tap into his incisive way of sizing up businesses. The two of them flew into Baltimore, and liked the Kohns immediately. They were the soul of integrity, reliable people with connections all over town.7 After the episodes with Lee Dimon at Dempster and Seabury Stanton at Berkshire, Buffett knew that if he were to buy a company, he needed a manager he could count on to run the business for him. He felt that Louis Kohn was that man. Kohn had a financial background and understood the numbers and profit margins well. Buffett had become confident of his ability to assess people quickly after experience with bringing in three hundred partners and meeting countless business executives over the years. The two men looked at the balance sheet and made a $12 million bid on the spot.
Munger did the negotiating with Louis Kohn’s relative Martin, the outgoing CEO, whom he considered “this wonderful old guy who headed the place.” He told Martin Kohn, “I came in here and I saw a lot of old women with swollen ankles standing behind your perfume counter, with unfunded pension liabilities. Do you really want to sell this business, which is the work of your life, to somebody who might worry you about their pensions? Don’t you want to take care of your own?”8 Kohn tossed the towel into Munger’s lap so fast that Charlie could barely catch it.9
On January 30, 1966, Buffett, Munger, and Gottesman formed a holding company, Diversified Retailing Company, Inc., to “acquire diversified businesses, especially in the retail field.”10 Buffett owned eighty percent of DRC. Gottesman and Munger each took ten percent. Buffett and Munger then went to the Maryland National Bank and asked for a loan to make the purchase. The lending officer looked at them goggle-eyed and exclaimed, “Six million dollars for little old Hochschild-Kohn?”11 Even after hearing this, Buffett and Munger—characteristically—did not question their own judgment and run screaming out the door.
“We thought we were buying a second-class department store at a third-class price” is how Buffett describes little old Hochschild-Kohn.
He had never borrowed any significant money to buy a company. But they figured the