Warren Buffett sticks with what he knows, and that now includes newspapers

Warren Buffett doesn’t buy Google.
Last week, he didn’t buy Facebook, the social-media phenomenon that started trading Friday on the Nasdaq, ending the day with a market capitalization of about $105 billion.
"I kind of ventured quite a ways out to buy IBM," Buffett said in an interview with the Fox Business cable network. "Facebook would be — my doctor would require a checkup."
No, Buffett puts money in things he understands. Among them: trains, insurance and newspapers.
Yes. Newspapers.
Atop his shopping list last week was a cluster of Southern newspapers in an industry that is — as Buffett himself said during this month’s shareholders meeting of Berkshire Hathaway Inc., his $200 billion company — declining.
In fact, he agreed to put $142 million in newspapers, buying the Winston-Salem Journal and all but one of Media General Inc.’s newspapers in a deal announced last week.
"Warren Buffett is the guy who orchestrated this transaction," said Terry Kroeger, president of BH Media Group, a holding company set up by Berkshire.
Efforts to contact Buffett were unsuccessful. In previous interviews, Buffett has said newspapers can do fine as long as they provide content that no one else does, and as long as they don’t provide it for free.
When the transaction goes through, probably by June 25, the ownership structure will have a few layers.
Kroeger said BH Media owns World Media Enterprises, which will be the actual owner of the Journal and 62 other dailies and weeklies in Virginia, North Carolina, South Carolina and Alabama, in addition to digital assets, including websites and mobile and tablet applications.

Douglas Hiemstra, the president of World Media Enterprises, will oversee the transition.
The deal Media General was looking for a way to deal with its debt due March 2013, said Marshall N. Morton, the president and chief executive officer of Media General.
The company really had two options: bond funds or private lenders. Morton said Media General initially looked at bond funds but decided to try a large private lender, such as Berkshire Hathaway, because media properties "are not viewed that positively by a lot of the professional bond funds."
"We really went to Berkshire Hathaway talking about debt, not talking about the sale of papers," Morton said.
Before talks between Media General and Berkshire took place, Berkshire already knew that Media General had announced in February its interest in selling its newspaper division, while keeping its broadcast properties.
"They came back to us on both fronts. ‘We’d like to pursue the idea of buying papers,’ " Morton said. "It was a two-part thing. It was initiated by us. Their interest in newspapers led us to expand the conversation."
Media General’s largest paper, The Tampa Tribune, was "never part of the equation" because Berkshire likes community newspapers, Morton said. The Richmond Times-Dispatch, which Media General considers a large paper and which is widely considered Virginia’s paper of record, is, in Berkshire’s perspective, a large community paper, he said.
To deal with the debt, Berkshire agreed to provide Media General with a $400 million term loan and a $45 million revolving credit line. The new loan will be used to fully repay the company’s existing bank debt due March 2013 and will mature in May 2020. Berkshire will get about 19.9 percent of Media General’s existing shares outstanding.
To delve deeper into the newspaper business, Berkshire started its conversations with Media General by looking at just a few newspapers. It would be "too much to get their arms around to go after so many newspapers, and then as they got to know our papers and know what you were doing and know your markets, they expanded their scope — to look at all of them," Morton said.
In the end, the deal was cemented in typical Buffett style — quickly.
Morton said it took little more than three weeks to settle the broader terms.
"We had always heard this about the Berkshire Hathaway group — that it made decisions and moved quickly," Morton said. "The plain fact is, once we came to terms, then it just became a question of ironing out details, and the basic terms never changed."
During the process, Buffett had a conversation with Kroeger, the BH Media Group president.
"I got a call from Warren, and he asked me how we would like to manage them (newspapers). I told him we would be very enthusiastic about that," Kroeger said. Berkshire, through World Media Enterprises, will be the second corporate owner of the Winston-Salem Journal in its 115-year history. The Journal has been part of Media General since 1969, when the company bought the newspaper from the Gray family.
The ‘Oracle’
Buffett, known around the world as the "Oracle of Omaha," loves bridge, Dairy Queen Dilly Bars and investing.
Since 1965, he has been the chairman and CEO of Berkshire Hathaway.
The company, based in Omaha, Neb., has 23 staffers at its corporate headquarters and employs more than 270,000 at a vast array of other businesses that range from the Acme Brick Co. to Geico.
Berkshire was a textile manufacturer based in New Bedford, Mass., when Buffett and his partners purchased it for about $14 million in 1965. Profits from the mill helped fund the company’s insurance investments, but Buffett told CNBC in 2010 that the textile company was the worst acquisition of his career.
Buffett eventually ended the company’s textile business and sold the mill’s equipment in 1985. He said in that year’s shareholder letter that "should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."
Berkshire’s sprawling business empire is built largely on its insurance operations. The company owns various property and casualty insurers, so it receives premium payments upfront and pays claims down the road.
"This collect-now, pay-later model leaves us holding large sums — money we call ‘float’ — that will eventually go to others," Buffett wrote in his latest annual letter to shareholders. "Meanwhile, we get to invest this float for Berkshire’s benefit."
In 1970, Berkshire’s insurance float was $39 million. At the end of 2011, it had grown to $70.57 billion, up from $65.83 billion at the end of 2010. That float, along with profits from the insurance companies, has given Berkshire a huge pile of cash over the years, money Buffett invested in a wide range of companies.
Buffett’s Woodstock About those shareholders: Each year, tens of thousands flock to Omaha for the company’s annual meeting — an event that’s been dubbed the "Woodstock of Capitalism." The meeting is so popular that Omaha’s CenturyLink Center, which seats 18,300, can’t hold the entire crowd.
Berkshire takes over the adjoining convention center during the show, allowing attendees to watch the meeting on big screens while they buy the company’s insurance, jets and jewelry, often at a special shareholder discount.
The meeting is famous for its simplicity.
After a video about Berkshire’s holdings, Buffett and his longtime business partner, Charles Munger, spend about six hours taking questions from shareholders, journalists and research analysts.
The topics range from Buffett’s views on Goldman Sachs and the federal government to his opinions on the business climate in emerging markets such as China and India. The official business portion of the meeting — electing directors and approving accountants — lasts less than 15 minutes.
Buffett has long endorsed a buy-and-hold investment strategy, both for individual stocks and entire companies.
Berkshire has held shares of iconic brands, including Coca-Cola and American Express, for decades. Its portfolio of stock investments, as of December, was bought at a cost of $48.21 billion but had a market value of $76.99 billion.
Lifetime investments When buying entire companies, Buffett looks for companies with strong management, sustainable business models and attractive pricing. As with stocks, he prefers to hold companies for life.
Businesses are left to run their own operations at the local level. Managers who grow profit are lauded in the shareholder letter and at the annual meeting.
But even an Oracle blows some calls. Buffett, speaking about some of the company’s manufacturing units in the 2011 shareholder letter, said some had low returns because he used Berkshire’s capital poorly.
"These errors came about because I misjudged either the competitive strength of the business being purchased or the future economics of the industry in which it operated. I try to look out 10 or 20 years when making an acquisition, but sometimes my eyesight has been poor," he wrote.
But Berkshire generally doesn’t sell companies that lag. Buffett said that’s because he makes a commitment to sellers that he’ll hold their businesses "through thick and thin."
Despite occasional missteps, Buffett is the world’s third-richest man, according to Forbes, trailing only Microsoft founder Bill Gates and Mexican telecom magnate Carlos Slim Helu.
Gates is a close friend of Buffett — the two were together Thursday — and he serves on Berkshire’s board. Buffett is in the process of donating virtually all of his fortune — valued by Forbes at $44 billion — to Gates’ charitable foundation.
Buffett still lives in the five-bedroom house he bought in 1958.
His sister, Doris Buffett, lives in Fredericksburg, Va., and is working to give away all of her assets before she dies. When The Times-Dispatch of Richmond spoke with her in December 2010, her Sunshine Lady Foundation had donated more than $120 million.

 

Bertrand Guterriez and Jacob Geiger write for the Winston-Salem Journal. Bloomberg News and The Associated Press contributed to this report.

 

 

here is a lot of finger pointing going on about Facebook’s initial public offering last Friday.

A lot of attention is being focused on the social media giant’s Chief Financial Officer David Ebersman, who decided to increase the number of shares offered to investors by 25 percent days before the IPO. The Wall Street Journal writes, "That decision by the 41-year-old Facebook executive may have doomed any real chance the social-networking company had that its stock would jump on its first day of trading—a hallmark of successful IPOs."

As the Facebook IPO rapidly becomes a public-relations and legal nightmare for the company and its Wall Street underwriters, there are legitimate complaints to be made, but laying blame on the CFO is not one of them. (See: Facebook Fallout: Morgan Stanley May Face Legal Liability, Attorney Says)

Investors are really frustrated about three aspects of the IPO, which not long ago was being hyped as the deal of the century.

The first problem, a legitimate complaint, was that NASDAQ’s computer systems failed on the morning of the deal. This led to many investors being unable to place or cancel stock orders or being left in the dark about whether their orders had been executed. This "glitch" may well have caused some investors to lose money.

The second complaint, which would deserve no sympathy if it weren’t for other recent revelations, is that Facebook’s stock did not "pop" as much as expected on the first day of trading. Investors have come to expect that such pops are as good as guaranteed on hot IPOs, and they therefore view them as a way to pick up some free money. But of course nothing is guaranteed, and every dollar short-term investors make from a big "pop" is a dollar the company has given away for nothing, so underwriters do a better job for their clients when they price their stocks just under the prevailing market value. In Facebook’s case, this initial market value was about 10% above the IPO price, or $42, which is plenty of "free money" for investors.

But then there are the recent revelations, which is that big institutional investors had much better information about the current condition of Facebook’s business than small investors did. This revelation may well have played into the modest stock "pop" on the first day of trading, and it may also have caused some would-be long-term institutional investors to jettison Facebook’s shares, thus exacerbating the price decline.

The information that big institutions were given was estimates for Facebook’s future performance, which were developed by the underwriters’ research analysts.

These estimates are verbally distributed in most IPOs, and the institutions use these estimates to help decide on a fair price to pay for the stock. In Facebook’s case, however, the underwriters’ analysts cut their estimates midway through the roadshow, which is a highly unusual and negative event. They did this because Facebook told them that its business outlook had deteriorated–information that was not given to small investors.

As a result of this estimate cut, combined with an increase in the size and price of the deal and the number of shares sold by insiders, some institutional investors "got the willies" about the Facebook deal. Individual investors, meanwhile, were unaware that anything had changed.

In the wake of these revelations, Facebook’s lead underwriter, Morgan Stanley, said that it had followed the rules. And it may have. If Morgan Stanley followed the rules, however, the rules themselves are grossly unfair. Because they allowed big institutional investors to learn just before the IPO that Facebook’s business had deteriorated, while smaller investors were left thinking everything was just fine.