27th February, 2021
Warren Buffett, known famously as Oracle of Omaha and CEO of investment company Berkshire Hathaway makes mistakes too.
And his errors can be really egregious and expensive.
The 90-year-old billionaire on Saturday admitted he “paid too much” when his Berkshire Hathaway Inc spent $32.1 billion in 2016 to buy aircraft and industrial parts maker Precision Castparts Corp, its largest acquisition.
Berkshire wrote off $9.8 billion of Precision’s value last August, as the coronavirus pandemic sapped demand for air travel and the Portland, Oregon-based unit’s products.
In his annual letter to investors, Buffett said he bought “a fine company – the best in its business,” and Berkshire was “lucky” to have Precision Chief Executive Mark Donegan still in charge.
But Buffett said he was “simply too optimistic about PCC’s normalized profit potential.”
Precision shed more than 13,400 jobs, or 40% of its workforce, in 2020, and only recently has begun to improve margins, Berkshire said.
“I was wrong … in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business,” Buffett wrote. “PCC is far from my first error of that sort. But it’s a big one.”
Precision Castparts Corps was not only overvalued, a year after Buffet’s acquisition, it was stung by a scammer, made to overpay by over €600million for a German company.
The normally shrewd investor was made to pay four times more than he ought to have paid to buy Wilhelm Schulz, a family-run manufacturer of stainless steel based in Krefeld, western Germany.
According to the finding of a New York arbitration court, Buffett’s company, Precision Castparts Corp ought not to have paid more than €156m for the German firm.
It ordered Schulz to make up the difference of €643m.
After the ruling in the US, a state prosecutor in Düsseldorf is now investigating the pipe maker, under suspicion of severe fraud for forging documents and falsifying balance sheets.
The forgery was done via Photoshopping of company orders and invoices, giving the notion that the company was doing very well.
In reality, the company Buffett bought was struggling and at risk of bankruptcy
Two years ago, Buffett also admitted he “overpaid” for Kraft Foods when Berkshire and private equity firm 3G Capital merged it in 2015 with their H.J. Heinz Co to form Kraft Heinz Co.
And in his 2008 annual letter, Buffett called his 1993 purchase of Dexter Shoe his “worst deal” ever, saying he had bought a “worthless business” and compounded his error by using Berkshire stock rather than cash to fund the acquisition.
“I’ll make more mistakes in the future – you can bet on that,” he wrote.
Tom Russo, a longtime Berkshire investor, welcomed Buffett’s candor.
“I admire Warren for taking personal responsibility for Precision Castparts,” he said. “Few managers are willing to admit their responsibility rather than pass on blame.”