Warren Buffett's Perfect Acquisition: The Case of See's Candy
Warren Buffett, one of the world's most successful investors, has always sought out companies that meet specific criteria to identify what he calls his perfect acquisition. Over the years, Buffett has identified several key characteristics that he looks for in potential acquisitions. Words of wisdom from the master investor can offer valuable insights for both individual investors and corporate strategists eager to understand his tactics.
Characteristics of a Perfect Business
According to Warren Buffett, a perfect business has the following three characteristics:
A high return on capital due to a strong competitive advantage.
A high return on incremental capital that it can deploy.
The ability to deploy a large amount of capital at those high rates of return.
When combined with a competent management team that is aligned with shareholders, these factors result in the perfect company. Buffett's investment success often hinges on his ability to buy such companies at a price that offers a substantial margin of safety. This margin of safety comes from purchasing a business at a price well below its intrinsic value.
The See's Candy Acquisition
One of Buffett's earliest and most successful acquisitions is See's Candy. In a significant move in 1972, Berkshire Hathaway acquired See's Candy Shops for 25 million dollars. This decision has proven to be a masterstroke, delivering exceptional returns over the years.
Sixty years ago, See's Candy generated a retail value of 4.2 million dollars in pre-tax earnings. Fast-forward almost four decades, and the picture is quite different. In 2007, the company reported record pre-tax earnings of 83 million dollars, totaling 1.65 billion dollars since its acquisition. These figures are remarkable, underscoring the value of a carefully chosen business and a prudent approach to investments.
Exorbitant Returns with Minimal Investment
One of the reasons behind See's Candy's success is its low working capital and fixed asset needs. The business model allows for significant growth with minimal re-investment. For example, the capital base of See's Candy increased from just 8 million dollars in 1972 to roughly 40 million dollars in 2007, in line with general inflation rates. This has led to an enormous return on investment, with nearly all pre-tax earnings being re-invested.
Buffett has attributed the success of See's Candy to several factors:
A defensible competitive edge, primarily through the "See's Candies" brand.
Substantial room for earnings growth, especially worldwide.
The ability to boost earnings with minimal re-investment, such as by regularly raising prices.
Outstanding management, particularly under the leadership of the See's family and subsequent CEOs.
An acquisition at an attractive price, in this case, 6x of pre-tax operating earnings.
By focusing on brands rather than assets, See's Candy has managed to thrive without the encumbrances that might sideline other companies. The simplicity of the business model, coupled with effective management, has resulted in a business that generates significant value without requiring huge sums of capital to scale.
Impact on Berkshire Hathaway
The impact of See's Candy on Berkshire Hathaway cannot be overstated. In the roughly four decades of ownership through 2011, the acquisition generated a 23% after-tax internal rate of return. Including the re-investment of excess earnings, the See's Candy acquisition accounted for more than a quarter of Berkshire Hathaway's book value at the end of 2011. This substantial contribution highlights the strategic brilliance of Buffett's acquisition decisions.
Buffett has often referred to See's Candy as his "dream business." For investors looking to emulate Buffett's strategy, the See's Candy story provides a blueprint for identifying and acquiring companies with these specific characteristics. The business not only generates significant long-term returns but also does so with a minimal capital requirement, making it an ideal candidate for value investors.
For individual investors and corporate strategists, the story of See's Candy serves as a powerful lesson. By focusing on a strong brand, a sustainable business model, and a well-aligned management team, and by purchasing the business at an attractive price, one can achieve extraordinary results. The next time an opportunity arises, consider the See's Candy model to identify and acquire the perfect business.
Conclusion
Warren Buffett's approach to acquisitions is a testament to his investment philosophy. By adhering to specific criteria and making strategic decisions, Buffett has built Berkshire Hathaway into one of the world's largest and most successful investment firms. The story of See's Candy is a shining example of how a carefully chosen business can generate enormous returns with minimal investment.