Friday, June 17, 2011

Munger’s Revenge, Part IV: Serious Benjamins



At the Berkshire Hathaway shareholder meeting, continued…

“Why did you handle this matter in the inadequate way you did?”
 This, the first question of the day, is the most direct criticism ever leveled on Warren Buffett from an actual shareholder, and it is greeted not by boos and catcalls, but by applause.
 Buffett begins his answer by attempting to explain what he knew and when he knew it—which turns out to be surprisingly little.
 To show just how little Buffett knew of what was going on, we’re going to arrange Buffett’s Sokol comments from the meeting along the timeline provided in the Lubrizol proxy statement (in italics), as  events occurred, rather than in the order in which Buffett spoke at the meeting, and contrast them with Sokol’s own version of events from his March 31, 2011 CNBC interview.

Sokol/Lubrizol Timeline

Fall of 2010: Sokol meets with various bankers “from time to time” to discuss “capital-raising and transaction ideas.”  This includes Citigroup bankers, from whom Sokol asks for “more information regarding possible transactions in several industries, including the chemical industry.”  The Citi bankers generate “a list and descriptions of 18 companies, including Lubrizol…”

 According to Sokol, “I get dozens of packages from investment bankers all the time, on ‘Hey, have you thought of some of these companies?’ or this and that.”  Furthermore, Sokol claims he already knew of Lubrizol on his own initiative.  “I got interested in Lubrizol—frankly I can’t tell you where I first heard the name—sometime last fall.  I pulled their 10-K.  Found what they’ve been doing the past couple of years interesting.  I made a decision to buy some shares….”
 Buffett will not hear of Sokol’s interest in Lubrizol until January 2011.

December 13, 2010: Sokol and Citigroup meet “to discuss the list of companies” assembled by Citigroup bankers.  “During the course of the meeting, Mr. Sokol said that the only company on Citi’s list that he found interesting was Lubrizol.  When Mr. Sokol learned from Citi’s representatives that Citi had an investment banking relationship with Lubrizol and its Chairman…James L. Hambrick, he asked one of the Citi representatives to inform Mr. Hambrick that he was interested in speaking with him and discussing Berkshire and Lubrizol, if Mr. Hambrick were available.  Mr. Sokol also advised Citi that Berkshire Hathaway does not engage in hostile transactions, and that Mr. Hambrick should understand that if they met and nothing came of the meeting, their meeting would remain confidential.  Thereafter, Citi made Lubrizol aware of these discussions…”

This is the kind of stuff that M&A activity is made of—serious M&A activity, but Sokol plays it down on CNBC, making his focus on Lubrizol seem personal, not related to business:
 “Now they had sent me a package earlier, with a whole number of chemical companies listed in it, again, all public information.  And they wanted to sit down and see if I wanted to follow up on that.  I mentioned to ‘em when they called, I said, ‘Listen, I’m going to be in New York on the 13th, you know, let’s talk.’ Only a couple of them even seemed to be interesting. And I had mentioned Lubrizol as one of those because it was a company I’d already been looking at, and since it was on their list, I said, ‘well, if we’re going to sit down, let’s talk about it.’”
 Of course, anybody who knows anything about investment bankers knows that they pretty much don’t even go to the bathroom without trying to figure out a way to make money on it: they are out to sell businesses.
 And David Sokol probably knows as much about investment bankers as any businessman on earth.
 Furthermore, it is reasonable to assume that the “package” sent by Citigroup’s bankers went to Sokol’s business address, not his personal address—as would be the case if he had been looking for personal investments.
 But Sokol describes the meeting as a general get-together rather than a discussion about a potential acquisition for Berkshire Hathaway:
 “We had a broad conversation where one of the bankers who was in the meeting said he knew the CEO of Lubrizol, and I said, ‘Gee, if you know him well enough to set up a meeting, that would be great, I’d love to meet him.’”
 Buffett knows nothing of this.

December 14: Sokol buys his first Lubrizol.  According to Sokol, “I put an offer in, actually, to buy 50,000 shares with a limit price.”  He gets 2,300 shares.
 Buffett is still in the dark.

December 17: Citigroup contacts Lubrizol CEO Hambrick and relays “the substance of the conversation between Citi and Mr. Sokol on December 13.”   Hambrick “indicated he would inform the Board of Berkshire Hathaway’s possible interest…”
 “Later on December 17, 2010, Citi informed Mr. Sokol that Mr. Hambrick had indicated that he would discuss Berkshire Hathaway’s possible interest with the [Lubrizol] Board.”
 Buffett knows none of this.

December 21: Sokol sells his 2,300 Lubrizol.  “Tax-planning,” he described it on CNBC.

January 5: Sokol begins buying Lubrizol again, in size.  “I thought it was a good company, a company I’d be happy to be invested in long-term.  The stock came back down, I put an offer in to buy a hundred-thousand shares…”

January 6: Lubrizol’s board has a special meeting during which “Mr. Hambrick outlined Berkshire Hathaway’s possible interest as he understood it from his conversation with Citi.  The Board engaged in an intensive and thorough discussion about Berkshire Hathaway’s possible interest.”
 Lubrizol’s Board retains a law firm and an investment back to help it “review Berkshire Hathaway’s possible interest in acquiring Lubrizol.”
 Sokol buys more Lubrizol.

January 7: Sokol finishes his purchase of Lubrizol, a total of 96,060 shares.  That’s close to being a $10 million investment—some serious Benjamins.
 He still hasn’t spoken to Buffett about Lubrizol.

January 10: Lubrizol holds a special Board meeting for “an extensive and thorough discussion about Berkshire Hathaway’s possible interest.”  The Lubrizol Board instructs CEO Hambrick “to arrange a meeting with Mr. Sokol.”

January 12: Citi calls Sokol to arrange a meeting.
 Sokol tells CNBC, “The next thing that happened is, I think it was January 12th, the banker from Citibank called me and said, ‘Hey, I think Jim Hambrick is going to give you a call to see if you want to…get together for dinner.’”

January 14: “Mr. Sokol and Mr. Hambrick had a telephone conference during which they generally discussed the corporate cultures and philosophies of both Berkshire Hathaway and Lubrizol, and arranged to have an in person meeting on January 25, 2011.

January 14 or 15: Sokol finally talks to Buffett about Lubrizol.

To be continued…


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com


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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

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