The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [409]
With too much cash, too few wonderful ideas, and without calling the Air-a-holic hotline, Buffett now bought a company for Berkshire called NetJets for $725 million.10 He sold the Indefensible and became one of NetJets’ customers. This company sold time-shares in jets of various makes and sizes; its planes all had tail numbers that started with QS, or Quebec Sierra. Susie had gotten Warren to buy her a quarter share in a “fractional” jet from NetJets in 1995, worth two hundred hours a year of flight time, which she referred to as The Richly Deserved.11 She joked that QS stood for Queen Susie. Buffett took to NetJets so much that he had appeared in an ad and endorsed it even before he bought it. Still, on the surface, it was an atypical decision for a man who would, one year later, tell the moguls at Sun Valley that somebody should “have shot Orville down.”
The reasoning behind the purchase seemed sound, though. NetJets was dominant in its market; it was too late for any serious competitor to catch up. Buffett figured that it was not unlike the newspaper business, where there were no red ribbons. Eventually, the competitors would fall away.12 And, indeed, NetJets was outgrowing the competition. Buffett was intrigued with its CEO, Richard Santulli, an entrepreneurial mathematician who had formerly spent his days at Goldman Sachs figuring out trading patterns using chaos-theory mathematics. Now he used those same skills to schedule plane flights on six hours’ notice for a database full of celebrity clients whom he entertained at private events. Buffett met a whole new set of famous people, including Arnold Schwarzenegger and Tiger Woods.
Investors cheered Buffett’s purchase of NetJets but were shocked when he almost simultaneously announced that Berkshire was buying General Re, a huge insurance wholesaler, or “reinsurer,” which bought excess risk from other insurers. At $22 billion, this deal was almost thirty times larger than NetJets. It dwarfed by multiples his largest deal ever, GEICO.13
When he met with the Gen Re management team, Buffett told them, “I’m strictly hands-off. You guys run your own business. I won’t interfere.” Then he suddenly started spouting numbers from GEICO. “Well, you know, their hit ratio has dropped a bit.*32 Last week their numbers were…” Holy cow! thought Tad Montross, General Re’s chief underwriter. This is hands-off? He knows more about GEICO than we know about General Re.14
Buffett did not know much about the inner workings of General Re. He had made the decision to buy based on studying the company’s results, and he liked its reputation. General Re was sort of the Grace Kelly of the sometimes-shady insurance business. General Re wore white gloves and historically had acted more ladylike and respectable than the average company. Still…given the pattern of Buffett’s purchases of insurers—in almost every case they plunged straight into the ditch shortly after he bought them—and given the size of this deal, the distant rumble of the tow truck’s engine warming up could be heard, barely audible, over the next hill.
But it was the high price paid for General Re that attracted most of the attention, and the fact that Buffett had paid in stock, not cash—in effect, swapping twenty percent of Berkshire Hathaway for General Re in a deal announced on the day that Berkshire hit its then-all-time high of $80,900 per share. People wondered if Buffett’s willingness to give away his stock when it was trading at such an unheard-of price meant that he, too, thought BRK was overvalued.15 Buffett had spent his career tightening his stranglehold on Berkshire. Giving stock to General Re’s shareholders diluted his own personal voting interest in Berkshire from forty-three percent to less than thirty-eight percent. The last time he had paid stock for a major purchase, it was GEICO, and investors had believed then that Berkshire was overpriced. So