The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [204]
See’s had a tentative deal on the table already and wanted $30 million for assets worth $5 million.26 The difference was See’s brand, reputation, and trademarks—and most of all, its customer goodwill. Susie Buffett, for example, was crazy about See’s, which she had discovered in California.
They decided that See’s was like a bond—worth paying $25 million for. If the company had paid out its earnings as “interest,” the interest would average about nine percent. That was not enough—owning a business was riskier than owning a bond, and the “interest rate” was not guaranteed. But the earnings were growing, on average twelve percent a year. So See’s was like a bond whose interest payments grew.27 Furthermore:
“We thought it had uncapped pricing power. See’s was selling candy for about the price of Russell Stover at the time, and the big question in my mind was, if you got another fifteen cents a pound, that was two and a half million dollars on top of four million dollars of earnings. So you really were buying something that perhaps could earn six and a half or seven million dollars at the time, if just priced a little more aggressively.”
They had to negotiate to buy the company from two people: first, Charles B. See—or “Candy Harry,” as Buffett, Munger, and Guerin called him—who was managing the estate of his recently deceased older brother, Larry See. The two brothers were partners, but Larry had run the business.
“Candy Harry really didn’t want to run See’s. He was interested in wine and girls. He wanted to chase after girls. But, of course, he got cold feet about selling at the last minute. Rick and Charlie went to see him, and Charlie gave one of the great lectures of all time on the advantages of grapes and girls, how the highest and best use of Candy Harry’s time was chasing after women.”
The other person involved was “Numbers Harry,” Harry W. Moore, the company’s finance chief and a director. Through its lawyers, Blue Chip set about courting Numbers Harry through the financial advantages of the deal, while suggesting to Candy Harry that a sale would relieve him of potential conflicts of interest that arose from serving as his brother’s executor.28
At the price Blue Chip offered, $25 million, the $4 million it was earning pretax would give Buffett and Munger payback of nine percent after-tax on their investment from the first day they bought it—not factoring in future growth. Adding in the $2 to $3 million of price increases they thought See’s could institute, the return on their capital would rise to fourteen percent: a decent level of profitability on an investment, although it wasn’t a sure thing. The key was whether the earnings would continue to grow. Buffett and Munger came close to walking. The pickings had been so easy until now, and they had such an ingrained habit of underbidding, that it was like swallowing live guppies for them to pay the asking price.
“You guys are crazy,” Munger’s employee Ira Marshall said. “There are some things you should pay up for—human quality, business quality, and so forth. You’re underestimating quality.”
“Warren and I listened to the criticism,” says Munger. “We changed our mind. In the end, they came to the exact dollar limit of what we were willing to pay.”29
While the deal was being struck, Buffett discovered that Tweedy, Browne already owned a thousand shares of See’s. Buffett ordered the firm to tender its stock to him. The Tweedy, Browne partners knew how valuable See’s was and thought the price was too low. They resisted and debated the issue briefly with Buffett. They did not see why they should give him their See’s stock. He insisted he needed the stock more than Tweedy, Browne did. Buffett won. They gave him the stock.30
The instant that the deal was inked and