Money mystery: Who are Berkshire’s billionaires?

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Posted: Saturday, September 21, 2013 12:00 am

Stewart Horejsi’s business was in a funk. It was 1980, and Brown Welding Supply, his family’s third-generation distributor of hydrogen and oxygen tanks, was battling competitors that were intent on expanding into the corner of Kansas he controlled.

“It was a profitable business, but companies took their money and bought more trucks,” Horejsi, 75, said from his home in Paradise Valley, Ariz. “The competition just grew.”

Frustrated, Horejsi bought 40 shares of Berkshire Hathaway Inc. for $265 each with the company’s cash after friends told him about Warren Buffett, the company’s then-little known chairman. He bought 60 more shares two weeks later at $295 and 200 more at $330 a month after that.

Today, he’s a billionaire. The 4,300 Class A shares of the Omaha-based conglomerate Horejsi says he holds is bigger than the stake controlled by Bill Gates, 57, the world’s richest person and Buffett’s bridge partner. His stake is valued at just under $750 million. He has a net worth of at least $1.1 billion, according to the Bloomberg Billionaires Index, and has never appeared on an international wealth ranking.

Horejsi joins a squad of billionaires minted by Berkshire. In addition to Buffett, the world’s fourth-richest person, at least six current or former billionaires derive their fortunes from Berkshire. Besides Horejsi, they include Charlie Munger, 89, the company’s vice chairman, and David Gottesman, 86, a Berkshire board member and founder of asset management firm First Manhattan Co.

Buffett’s late wife, Susan, died in 2004 with a 2.2 percent economic interest in Berkshire. Albert Ueltschi, founder of FlightSafety International Inc., which Berkshire acquired in 1996 for about $1.5 billion in stock and cash, sold his 31.8 percent stake for Berkshire shares, a holding that would have been valued at $2.4 billion when he died 16 years later. Harold Alfond, founder of the Dexter Shoe Co., died in 2007 with $3 billion in Berkshire stock.

There are probably other Berkshire billionaires to be uncovered. In a June 2010 Fortune magazine article, Buffett said that he knew of two Berkshire shareholders who qualify for the Forbes 400 list of wealthiest Americans and weren’t on it.

“There are a lot of them out there,” Debbie Bosanek, Buffett’s assistant, said in an email, referring to the number of people who could have become Berkshire billionaires had they not given their shares to charity. She said Buffett, 83, declined to comment.

Horejsi got in early and held.

“I’ve been to 32 annual meetings,” Horejsi said, recalling some early gatherings held in the cafeteria of Berkshire insurance subsidiary National Indemnity Co. in downtown Omaha. “There were 12 of us on folding chairs. I took friends and planted questions with them to keep the meeting going in future years.”

Horejsi (pronounced “Horish”) built his Berkshire stake to 5,800 Class A shares, and sold 1,500 of them, beginning in 1998. A year later, he sold the family welding-supply company to Radnor, Pa.-based Airgas Inc. He accumulated control of four closed-end stock funds and now co-manages them through Boulder, Colo.-based Boulder Investment Advisers LLC, his money management firm.

The lost billionaires Buffett was referring to probably fall into two varieties of Berkshire shareholders. One is composed of investors in the early investment partnerships Buffett managed, the first of which was started in 1956. The other includes business owners smart or lucky enough to sell their companies to Berkshire for stock instead of cash.

Nailing down details of what the sellers got for their businesses isn’t easy. Berkshire usually doesn’t disclose what it pays for closely held companies. It did, though, in the case of Executive Jet Aviation, now called NetJets, a marketer and operator of a fractional jet ownership program. The company’s founder, Richard Santulli, 69, sold the business to Berkshire with Goldman Sachs Group, which had owned 25 percent.

Berkshire Hathaway paid about half the $725 million purchase price in stock, which traded at $69,800 the day the deal closed in August 1998. If Santulli collected 75 percent of his portion of the proceeds in stock — the maximum possible — it would amount to the equivalent of about 5,190 Class A shares, valued at more than $900 million at Thursday’s $175,825 close. Santulli had less than half the equity in the company and didn’t hold on to all of the shares he received, according to a person familiar with the transaction. He contributed a portion of his proceeds from the sale to his charitable foundation, the RTS Family Foundation, and other philanthropic groups, the person said.

In 1995, without disclosing terms, Buffett used Berkshire shares to buy two retailers: R.C. Willey Home Furnishings of Salt Lake City, and North Kansas City, Mo.-based Helzberg’s Diamond Shops. Berkshire’s 1995 annual report disclosed that it paid a combined 15,762 shares for both companies.

Based on the company’s share price on the day the deal closed, Berkshire spent $173 million in stock for the jewelry business, according to a regulatory filing that shows Barnett Helzberg and his wife, Shirley, received 7,510 shares directly. Today, the 79-year-old’s stake would be valued at $1.3 billion.

Much of that has been given to charitable interests, according to a person familiar with Helzberg’s giving.

If Bill Child, 81, Willey’s CEO, received three-quarters of the remaining 7,730 shares, he would be a billionaire today had he held onto the stock.

He didn’t. Child disbursed more than half the shares he received, he said in an interview this month.

“We decided the best use of our money was to give it away,” Child said.

Berkshire billionaires — or their estates — are out there, according to a Dec. 12, 2012, press release from the company.

“Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a longtime shareholder,” it said.

Those shares were valued at $1.2 billion that day. FlightSafety founder Ueltschi died two months beforehand.

Two people associated with Buffett’s pre-Berkshire partnerships died in the 14 months before the release. The first was Bernard Sarnat, a plastic surgeon and craniofacial specialist in Los Angeles who died in October 2011. His 98-year-old wife, Rhoda, was a cousin of Buffett’s mentor, Benjamin Graham.

The couple are mentioned in “The Snowball,” a Buffett biography by Alice Schroeder. The book says they invested $10,000 initially into one of Buffett’s early partnerships, which he consolidated into Buffett Partnership Ltd. in 1962. In order for their fortune to exceed $1 billion today, they would have had to purchase additional Berkshire shares.

The other was Norton Dodge, an economics professor at St. Mary’s College of Maryland who became known for collecting Soviet dissident art and died in November 2011. His father, Homer Dodge, invested $120,000 in a partnership in 1956. The investment gave Buffett the capital he needed to get off the ground, according to Schroeder.

“Homer almost single-handedly made Buffett,” she said in an interview.

An investment of $10,000 in one of Buffett’s three initial partnerships would have grown to $172,953 by the time the partners’ money was distributed in 1970, according to data compiled by Bloomberg.

The partners at that point were offered pro-rated stock in Berkshire, which was thinly traded and controlled by Buffett. There also were two other illiquid holdings, Diversified Retailing Co. and Blue Chip Stamps Co., which were eventually merged into Berkshire.

In a Dec. 26, 1969, partnership letter, Buffett said that he expected to pay partners 64 percent of their investment in cash and the balance in stock. Partners could sell their Berkshire shares back to Buffett, hold them, or buy more. Buffett provided one of history’s most-valuable stock tips when he said he planned to buy more Berkshire and Diversified stock.

“I am very happy to have a material portion of my net worth invested in these companies on a long term basis,” he said in the letter. “Obviously, I think they will be worth significantly more money five or ten years hence.”

One investor who received stock was Homer Dodge, a physicist who built the University of Oklahoma’s physics and astronomy department.

Dodge showed up at Buffett’s Omaha house with a canoe strapped to the roof of his car, according to Schroeder’s book. Buffett set up a partnership with Dodge’s $120,000 investment.

Dodge’s investment would have grown to $2.1 million by the time the Buffett Partnership was dissolved, based on figures published in investor letters. The portion paid out in Berkshire and other stock may have amounted to about $750,000 — the equivalent of 15,897 Berkshire shares. Dodge also would have received about $1.1 million in cash after taxes.

Homer Dodge died in 1983. He was survived by his son, Norton, and daughter, Alice Dodge Wallace. The children may have avoided the 60 percent maximum estate tax in place in 1983, according to Schroeder. In a 1989 interview with Fortune magazine, Buffett described the Dodge partnership as one “set up with Homer, his wife, children and grandchildren.”

Schroeder says that suggests a generation-skipping trust.

“Buffett did weird stuff on the side,” she said. “It’s not an unreasonable leap to make that assumption.”

At the time, Buffett recommended that partnership investors trust their money with Bill Ruane of what is now known as Ruane, Cunniff & Goldfarb Inc.

The Sequoia Fund that Ruane started in July 1970 has grown at a 14.5 percent annualized rate, according to data compiled by Morningstar Inc. Had Dodge and his children invested the $1.1 million in the fund, it would now be valued at about $390 million. The 15,897 Berkshire shares the estate may have received would be valued at more than $2.7 billion.

If the assets were split equally upon Homer Dodge’s death, Alice Dodge Wallace, 92, and Norton Dodge’s widow, Nancy Ruyle Dodge, 76, would have fortunes of more than $1.5 billion.

As for Horejsi, he travels on planes operated by NetJets to homes in Mount Hood, Ore.; Paradise Valley, Ariz.; and Barbados, where he lives in a beachside estate that once belonged to movie star Claudette Colbert.

“He’s a believer in Warren Buffett,” said Richard Barr, Horejsi’s fraternity brother at the University of Kansas. “And he’s a firm believer in buy and hold.”

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