Warren Buffett's Atlanta

The world's greatest investor has a significant stake in Georgia. And he may be looking for more.

Drew Ermenc

October 22, 2007

 It was a cold December day in 2001, and Steve McKenzie and Craig Ponzio had just stepped off an elevator onto the top floor of the understated Kiewit Plaza office building in Omaha, Neb. Just 48 hours earlier, Ponzio, owner of custom framing leader Albecca Inc., had overnighted his company's financials to Berkshire Hathaway with the hopes that its iconic leader, Warren Buffett, may have interest in purchasing the Norcross-based company.

Ponzio bought Albecca in 1981, known to consumers under the brand name Larson-Juhl, and led the company to remarkable success, growing revenues from $3 million to $300 million in under two decades.

But today was a different story, as health issues were forcing Ponzio to sell. With one well-placed phone call, there they stood, summoned to the Omaha offices of one of America's most storied companies, anxiously awaiting negotiations with arguably the world's most influential business executive.

McKenzie, then Albecca's CEO, remembers his surprise –and relief – when Buffett politely greeted them at the entrance, the antithesis of a corporate power play.

"There's a little buzzer we pushed, and Warren actually answered the door," McKenzie recalls with a grin. "When he appeared, you see this kind of bigger-than-life figure that you read about constantly, you study, and you hear from as an expert. All of a sudden, I [felt] torn between this idea of him as the father of capitalism and thoughts of my own grandfather."

The meeting took only 90 minutes, and ended with Berkshire Hathaway agreeing to purchase Albecca for $223 million (plus assumed debt), a deal that was, according to Buffett, one of the quickest he'sever completed. Today, McKenzie smiles when he recalls the experience, and still marvels at Buffett's disarming nature and get-to-the-point intuitiveness. "The conversation was absolutely comfortable, a fantastic conversation about the mechanics of our business model and what made us unique. It was a very enjoyable interaction."

Since 2000, Buffett has moved aggressively into Georgia, acquiring five companies headquartered here in the past seven years. Prior to the turn of the millennium, his connection to the Peach State was limited to his stake in Atlanta-based Coca-Cola, a stock he first purchased in 1988. He felt that – by adhering to his investment philosophy that emphasizes strong brands, consistent earnings and patience–the beverage maker's stock was undervalued. In a caffeinated frenzy, Buffett began buying large chunks of Coca-Cola at $10.96 a share. Within five years, the stock grew to $74.50 a share, and he now owns roughly 81/2 percent of the company. Until last April, Buffett had served on Coke's board of directors for 17 years and has claimed he will hold on to his shares "forever."

Since Buffett began his Peach State push, his largest and most significant transaction has been Shaw Industries, the Dalton-based carpet manufacturer whose history of strong management and leading market share was an enticing opportunity for Buffett to expand into the carpet industry. First acquiring 87 percent of Shaw in January 2001, Buffett announced his intent to purchase the rest of the company a year later, spending an estimated total of $2.45 billion. With 30,000 employees and annual revenues of more than $5 billion, Shaw became the largest non-insurance company within Berkshire's portfolio.

Also in 2001, HomeServices of America purchased Jenny Pruitt & Associates, the well-respected Atlanta-based realty company. HomeServices is a subsidiary of MidAmerican Energy, whose corporate parent is – you guessed it – Berkshire Hathaway, and has grown to become the nation'ssecond largest real estate brokerage. Buffett has been quoted as saying Berkshire fell into the real estate business "by accident" with its purchase of MidAmerican Energy in 2000.

Following the Larson-Juhl acquisition in 2002, Buffett and Berkshire slowed their Georgia acquisitions until 2006, when they again went on a buying spree. In April, Berkshire announced its intentions to acquire Russell Corp., the struggling athletic apparel company based in Atlanta, for $600 million. Berkshire then folded the division into its newly acquired Fruit of the Loom HomeServices, a subsidiary of Berkshire, entered the booming Atlanta market by acquiring real estate agency Jenny Pruitt & Associates in October 2001.

And in May, HomeServices continued its quest for added real estate market share in Atlanta by acquiring Harry Norman Realtors, the area's third largest home seller. In this flattening world of globalization, is the Oracle of Omaha opting to invest in a region rather than a specific industry? Probably not, according to McKenzie, but it does show the impact the Georgia economy is having on the rest of the world. "I do think the business environment in Georgia was such that some companies were allowed to flourish here in the ‘80s and ‘90s that are bearing fruit today; viable companies and something significant for Berkshire to take a look at."

Through his remarkable investment prowess, Buffett is a white-collar rock star, the Elvis Presley and Dalai Lama of securities strategists. The Wall Street Journal,arguably the most respected and widely read business publication in the world, speculates on his business doings in much the same fashion as US Weekly's coverage of Britney Spears' late nights. And why not? He's the second richest man in the world according to Forbes magazine's annual list, and he just may be the world's greatest investor, with an enormously successful track record and a long-term growth ideology that mocks harried day traders and quick-buck investors time and again.

But there's also another side to the Oracle of Omaha's success that many admirers cannot view. Buffett has garnered the reputation in his inner circle as a down-to-earth, accessible leader; a manager whose personality and discourse lowers stress and maintains a higher level of ethics. Yes, he finds great values in stocks and investment opportunities, but his management philosophy is an equally compelling piece to his formula of success.

Georgia has seen its share of over-the-top, braggadocios billionaires over the years, but Buffett doesn't fit in the mold of owning restaurant chains and pro sports teams. His down-to-earth folksy manner and metaphoric wisdoms are legendary, and a welcome respite to the stuffed-shirt-and-company-line innuendo commonplace on CNBC and other news outlets. He's lived in the same house in Omaha he purchased in 1958 for $31,500. His friends, peers and subordinates call him by his first name. He munches on burgers and guzzles Cherry Cokes on a regular basis, and he pays himself an annual salary of $100,000, a figure dwarfed by the salaries of far less competent CEOs. Yet his net worth stands at an estimated $52 billion, all self-made through his investment prowess and all but 15 percent of his fortune going to charitable institutions when he passes.

Buffett holds the keys to the kingdom that is Berkshire Hathaway, a former textile-turned-holding company that serves as the umbrella under which more than 70 major companies and thousands of subsidiaries do business. Berkshire employs more than 217,000, and ranks 12th on the Fortune 500, with annual revenues of just under $100 billion.

The company is one of the most impressive success stories on the U.S. stock market. At press time, Berkshire class-A stock had risen to $122,000, the first stock to ever reach six figures,and by far the most expensive stock on the U.S. market. Gary Ransom, an analyst at Fox Pitt Kelton Cochran Caronia Waller, sees Berkshire's diverse portfolio as an advantage against market volatility. "It's been a stock that has underperformed when the market was stronger, like in '02 and '03, and when the market is weak, like the last three months, it's actually done well," he says. "It's a great defensive stock because it's so diversified in its deals. With so many of these basic businesses, it's not going to be confronting the kinds of ups and downs that a lot of other companies might have; a lot of other things get smoothed out in all the different operations it has."

To comprehend the success of Berkshire Hathaway, one must first understand the company's basic business structure. Historically, Buffett's main focus has been insurance, having acquired industry giants GEICO Corporation, General Re and National Indemnity, a commercial auto and general liability insurer he bought in 1967. Several of Berkshire'sinsurance companies, like General Re, focus much of its activities on reinsurance, or insurance paid to hedge against major catastrophes.

The strength of a reinsurance company typically is its float, or capital the company must have on hand to pay out in case of a disaster. This float comes from premiums paid up front from its insurance customers. At the end of 2006, Berkshire's float stood at nearly $58 billion, a staggering number compared to others in the insurance industry. In a shareholder letter, Buffett once wrote that his float "has cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had a value to Berkshire greater than an equal amount of net worth would have had." The float gives Berkshire – and its crafty leader – a sizable amount of capital to invest in other companies that he sees as long-term values.

Berkshire's portfolio is currently made up of companies that are wide ranging and diverse – just the way Buffett likes it – and include well-known acquisitions like Clayton Homes, Dairy Queen, See's Candies, Justin Boots and Fruit of the Loom. Buffett, a firm believer in the theory that a strong brand holds a competitive edge, or as he's coined, a "defendable and sustainable moat," also owns significant stakes in iconic American companies like Johnson & Johnson, American Express, Anheuser-Busch, and Wal-Mart.

Even with Buffett's macro sense of purpose and storied investment history, executives like McKenzie and Ponzio can agree that his disarming approachability is an often overlooked and understated trait. He's a great manager, not just a great investor, and his success can, at least in part, be attributed to the way he leads and evaluates talent.

Ron Peltier, the president and CEO of HomeServices, the subsidiary of Berkshire who owns local real estate agencies Jenny Pruitt and Harry Norman, sees Buffett's strengths in areas other than just forecasting long-term investments. "He has tremendous soft skills. On the surface, you would think he would have uncanny financial acumen and perspective. The truth is, he has tremendous intuitive skills because he has demonstrated through the years that he has constantly found great companies with outstanding leaders," he says. "He has said over and over again that a good company needs a leader with high energy and great skills, but if they don't have integrity and character, the other two don't matter," Peltier adds. "He has such a long track record of success you couldn't come up with any other conclusion that he has great understanding of people."

McKenzie also feels Buffett's emphasis on business ethics has a positive affect on his company. "From time to time, you'll get a message or a letter from Warren that really reinforces his perspective of values and doing things right. It's what's not said regularly, but with authority occasionally that just reinforces that as long as you're ethical and making sound business decisions, you're doing the right things."

Buffett himself downplays his keen insight, instead focusing on the team that surrounds him. In his 2006 Berkshire shareholders report, he writes, "I've taken the easy route, just sitting back and working through great managers who run their own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions. Our managers have returned this trust by working hard and effectively."

The anti-private equity In an age of private equity groups looking to make quick returns, Berkshire's long-term, hands-off approach is a refreshing alternative. Critics of private equity groups fear the "strip and flip" method of loading the acquisition up with debt and, in turn, laying off employees to cut costs.

Not so with Berkshire, says Vance Bell, the CEO of Dalton-based Shaw Industries. "The main thing is Berkshire are long-term investors," he says. "[Buffett] has a long-term view and when he acquires companies he doesn't dispose of them or sell them. He's basically there for life. He's very much a long-term player. The private equities are there to leverage it and sell it. It's really the opposite of extremes."

"The private equity guys are doing something different," Ransom says. "They're trying to accomplish some money-making opportunities in a medium term, like five to 10 years, or maybe even three to seven years. Berkshire always has been about long-term acquisitions, and so far that means they haven't sold anything" when they buy whole companies.

Dan Parmer, president and CEO of Jenny Pruitt & Associates, a subsidiary of HomeServices, sees a similar operational philosophy between him and his parent company."They expect local management to make good decisions. They don't tell you what to do and you don't go to them for every little decision."

"[Buffett] is as advertised," says Bell. "He allows the businesses to operate and he only provides guidance and input whenever someone wants it."

Nearly all the Berkshire companies possess similar traits, especially the Georgia acquisitions, and all with characteristics that Buffett finds critical to determining long-term value. He's written in his shareholders letter that "consistent earnings, good returns on equity, able and honest management and at a sensible price" are the keys to finding value in acquisitions. He's been equally admonished and cheered for his "if I don't understand the industry, I don't get involved" investment strategy that sailed through the dot-com boom and bust. Yet he continues to stick with his principles, analyzing and truly understanding the value of his acquisitions.

McKenzie, who stayed on as CEO of Albecca after the buyout, believes his company was a perfect candidate for what Buffett looks for. "We met all of that criteria," he says. "We were an industry leader. We had what he likes to term a‘sustainable and defendable moat.'It was a product that he could understand and he feels that consumers could understand. I'm cautious to say that he was very satisfied with the management of the business. We met all of the financial criteria plus all the extra criteria and he had a great comfort in the business model we had."

In the same vein as the age-old chicken-egg dilemma, do strong business ethics and good management attributes trickle down from the Berkshire philosophies, or are targets more attractive because of these characteristics? Bell believes the culture is equally analyzed as part of the acquisition process, which is what made Shaw a natural fit for Berkshire's portfolio. "Part of the beauty of Berkshire's acquisitions is a knack of finding companies that fit its culture. Shaw had a very ethical, very business-like approach; our mission statement values integrity, honesty, and hard work," he explains. "We really haven't had to change anything for Berkshire's culture."

Peltier feels a sense of pressure about working for a company with the values that Berkshire expects. He says, "There's this higher level of accountability and responsibility" associated with Berkshire. "We should all be operating that way anyway.When you've got a reputation that is bigger than your own, you have that ability to impact that reputation; there is that pressure. We think it's good pressure."  He says, "[Buffett is] clearly like a good parent; he sets an exemplary example of how one should conduct oneself and the values and character and the integrity.It goes back to the standard that he's set. He's a good role model and a very good mentor to really anyone within Berkshire Hathaway and to anyone in business on how to lead and run a great company."

"From time and time, circumstances come up that give me concern, and every time I call Warren, he helps put it in perspective of the bigger Berkshire Hathaway situation," McKenzie says. " He reinforces what is right; right for the team member and right or the customer. It's always affirming to get that kind of response. It's not everywhere that you have an owner that [will do that]. If you have a business that has a sustainable market position, has a strong corporate culture of ethics, and is run by reasonably intelligent people, I can think of no better ownership situation."

Want to get your business in front of Warren Buffett?

Here's what he looks for in acquisition targets:

Strong brand– Buffett stresses the importance of a competitive advantage and customer loyalty to the product, regardless of industry. He calls this a "sustainable and defendable moat."

Good management – Buffett almost always retains top management after an acquisition, maintaining a hands-off approach. He says, "I've taken the easy route, just sitting back and working through great managers who run their own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions."

Consistent earnings– Buffett is willing to put capital in his new acquisitions, but he wants to see that he's going to get a return. If your company's revenues are volatile from year to year, he probably won't be interested.

Easily understandable product – Buffett famously passed on Microsoft during its 1990s stock price blastoff because he admitted he didn't understand the technology. Make sure your product is easy to comprehend and has a business model that makes sense.

Strong ethics– Buffett places a heavy emphasis on company values and he's a keen judge of character. A history of corporate malfeasance will not improve your chances.