Warren Buffett Watch: Koch's takeover of Molex leaves elephant-sized tracks

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Posted: Sunday, September 15, 2013 12:00 am

Did Buffett let an elephant escape?

Koch Industries of Wichita, Kan., operated by brothers Charles and David, is paying $7.2 billion for Molex, an electronic parts maker, Reuters reported, in what may be the sort of deal that excites corporate hunter Warren Buffett.

Over the years Buffett has bought several family-controlled businesses like Molex and calls such big targets “elephants” in his metaphorical hunt for businesses to add to Berkshire Hathaway Inc., the Omaha-based conglomerate he heads.

He touts Berkshire as an attractive owner because he leaves existing management in place, doesn't interfere with well-run subsidiaries and encourages the former owners to continue operating as they have.

The Kochs recently put out word that they, too, could become a “permanent home” for businesses looking for a longtime owner who would let businesses operate independently within a larger corporation.

The sale even involved the services of Byron Trott, a former Goldman Sachs investment manager who helped with several big Berkshire purchases over the years, Reuters noted, speculating that Buffett had a chance to buy Molex but declined.

This is a bolt-on that really bolts on.

Berkshire's industrial materials subsidiary MiTek acquired SidePlate of Laguna Hills, Calif., in 2009, one of many “bolt-on” purchases that Buffett favors because they help Berkshire's businesses grow without taking his time or using much new capital.

SidePlate said its employment has doubled in the past three years to 20 people as demand grows for its consulting and project management services.

Its patented products literally bolt in place, connecting beams and other parts of metal buildings so they will resist earthquakes, blasts and other forces that can collapse buildings.

The company started in 1995, developing the connection systems in response to the 1994 Northridge earthquake in California.

Berkshire's NetJets division is doing well partly because of its central Ohio location, CEO Jordan Hansell told Columbus Business First.

Ohio, home of flight pioneers the Wright brothers, is “a very strong business-aviation and aviation state in general,” Hansell said. NetJets helps support an aviation program at Ohio State University, and he noted that 60 percent of the U.S. population is within a 90-minute flight of Columbus.

NetJets' “fractional” ownership business model is gaining, he said. “People are more and more interested in the fractional program,” although “to some extent there's memory from the recession.”

He said the company expects to start operating wholly owned aircraft for customers in China in early 2014.

Buffett is a “key mentor” for the head of a Memphis, Tenn., investment fund that owns 12 percent of News Corp., the media company headed by Chairman Rupert Murdoch.

Nick Tabakoff reported in the Australian that Southeastern Asset Management, headed by Otis “Mason” Hawkins, made the $398 million investment, out of the fund's $33 billion total investments.

The News Corp. owns the Australian as well as the Wall Street Journal and New York Post, plus newspapers in Great Britain and other communications outlets. The article mentions Buffett's ownership of dozens of U.S. newspapers through Berkshire.

“The fact he has quickly followed Mr. Buffett into buying print assets may not be mere coincidence,” Tabakoff wrote, citing a 2010 interview in which Hawkins said he was influenced by Buffett and other value investors like John Templeton and Ben Graham.

“We believe that buying securities at large discounts to conservative appraisals provides the best route to above-average compounding,'' Hawkins said, especially “when sellers are under duress or traders are consumed with ephemeral short-term issues.”

American International Group Inc. is cutting ties with Berkshire by not signing new reinsurance contracts, Bloomberg reported, citing an unidentified source with knowledge of the decision.

AIG stopped entering into new deals with Berkshire's National Indemnity Co. of Omaha and General Reinsurance about two months ago, the story said, but is leaving existing contracts in place.

In May, Buffett announced that a group of executives would leave AIG and join Berkshire to start a commercial insurance business, including Peter Eastwood, who headed AIG's property-casualty operation in the Americas.

Bloomberg said Berkshire's new business challenges one of AIG's main markets.

Berkshire has been the biggest backer of AIG's risks, totaling $2.19 billion, or about 8.5 percent of AIG's total reinsurance as of Dec. 31.

H.J. Heinz Co., half-owned by Berkshire, is considering about 250 job cuts out of 2,500 workers in the United Kingdom and Ireland as it restructures its business, Food Business Review reported.

Heinz is being run by 3G Capital, a private equity firm based in Brazil, which combined with Berkshire to buy Heinz for $28 billion in June. Earlier, Heinz said it would eliminate 600 U.S. and Canadian jobs, seeking a “streamlined structure” that would simplify, strengthen and leverage its global presence.

Overall, the company plans to cut 1,200 jobs, out of 31,900, and expects $160 million in severance expenses, Bloomberg reported.

The Omaha World-Herald is owned by Berkshire Hathaway Inc.

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