Buffett Says Pricing Power More Important Than Good Management
2011-02-18 05:00:03.3 GMT
By Andrew Frye and Dakin Campbell
Feb. 18 (Bloomberg) -- Warren Buffett, the billionaire
chief executive officer of Berkshire Hathaway Inc., said he
rates businesses on their ability to raise prices and sometimes
doesn't even consider the people in charge.
"The single most important decision in evaluating a
business is pricing power," Buffett told the Financial Crisis
Inquiry Commission in an interview released by the panel last
week. "If you've got the power to raise prices without losing
business to a competitor, you've got a very good business. And
if you have to have a prayer session before raising the price by
10 percent, then you've got a terrible business."
Buffett, 80, accumulated the world's third-largest personal
fortune through a career of stock picks and takeovers. He has
bought companies such as railroads and electricity producers,
whose pricing power stems from a dearth of competitive options
available to clients. Buffett has also built stakes in firms
like Coca-Cola Co. and Kraft Foods Inc., which rely on the
appeal of their brands to attract and keep customers.
"The extraordinary business does not require good
management," Buffett said in the interview, which was conducted
on May 26 in Omaha, Nebraska.
The FCIC investigators focused on Buffett's investment in
Moody's Corp., the bond-ratings firm blamed by lawmakers for
handing out inflated credit grades during the housing boom.
Buffett said he held stock in Moody's because the company's
leading market share, along with that of rival Standard &
Poor's, a subsidiary of McGraw-Hill Cos., gave the two firms
flexibility in setting prices.
Pricing Power
"I knew nothing about the management of Moody's," said
Buffett. "If you own the only newspaper in town, up until the
last five years or so, you had pricing power and you didn't have
to go to the office."
A dominant position can't prevent a bad manager from
destroying a company over time, said Benjamin E. Hermalin, a
professor of economics at the University of California,
Berkeley's Haas School of Business.
"If you have a really dominant position you can survive
for quite a long time with bad management but eventually it will
catch up to you," said Hermalin. "In the short run I would
agree with Buffett but in the longer-run perspective there is
something to be said for having a good manager."
Burlington Northern Santa Fe, the railroad Buffett bought
last year for $26.5 billion, owns more than 30,000 miles of
track across the U.S. West connecting producers and distributors
of coal, grain and consumer goods. Omaha-based Berkshire's power
company, MidAmerican Energy Holdings Co., sells electricity to
homes in the Great Plains and transports natural gas from
Wyoming to California.
Praise From Buffett
Buffett routinely singles out and praises managers from
Berkshire's more than 70 operating companies. MidAmerican
Chairman David Sokol and Gregory Abel, the unit's CEO, are "two
terrific managers," Buffett said last year in his letter to
shareholders. The acquisition of Burlington Northern had the
"additional virtue" of bringing the railroad's CEO, Matthew
Rose, to Berkshire, Buffett said.
Buffett criticized Kraft Chief Executive Officer Irene
Rosenfeld last year for her takeover of Cadbury Plc and the sale
of the foodmaker's pizza brands. "Both deals were dumb,"
Buffett told Berkshire investors in May. Berkshire is the
biggest shareholder of Kraft with a stake valued at $3.3 billion
at the end of December.
"In the short run, good management can make a stock pop
but I follow what Warren's saying, especially because his point
of view looks at the fundamentals," said Terry Connelly, dean
of the Ageno School of Business at Golden Gate University in San
Francisco, and a former managing director at Salomon Brothers.
"Good management can't do anything with a bad case."
For Related News and Information:
Government rescue programs: RESQ <GO>
Berkshire's equity holdings: BRK/A US <Equity> PHDC5 <GO>
Buffett-related audio & video: BRK/A US <Equity> TCNI AV <GO>
More on Buffett: BIO WARREN BUFFETT <GO>
--With assistance from April Lee and Noah Buhayar in New York.
Editors: Dan Reichl, Andreea Papuc.
To contact the reporters on this story:
Andrew Frye in New York at +1-212-617-1869 or
afrye@bloomberg.net;
Dakin Campbell in San Francisco at +1-415-617-7174 or
dcampbell27@bloomberg.net
To contact the editor responsible for this story:
Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg.net
Rick Green at +1-212-617-5804 or
rgreen18@bloomberg.net
2011-02-18 05:00:03.3 GMT
By Andrew Frye and Dakin Campbell
Feb. 18 (Bloomberg) -- Warren Buffett, the billionaire
chief executive officer of Berkshire Hathaway Inc., said he
rates businesses on their ability to raise prices and sometimes
doesn't even consider the people in charge.
"The single most important decision in evaluating a
business is pricing power," Buffett told the Financial Crisis
Inquiry Commission in an interview released by the panel last
week. "If you've got the power to raise prices without losing
business to a competitor, you've got a very good business. And
if you have to have a prayer session before raising the price by
10 percent, then you've got a terrible business."
Buffett, 80, accumulated the world's third-largest personal
fortune through a career of stock picks and takeovers. He has
bought companies such as railroads and electricity producers,
whose pricing power stems from a dearth of competitive options
available to clients. Buffett has also built stakes in firms
like Coca-Cola Co. and Kraft Foods Inc., which rely on the
appeal of their brands to attract and keep customers.
"The extraordinary business does not require good
management," Buffett said in the interview, which was conducted
on May 26 in Omaha, Nebraska.
The FCIC investigators focused on Buffett's investment in
Moody's Corp., the bond-ratings firm blamed by lawmakers for
handing out inflated credit grades during the housing boom.
Buffett said he held stock in Moody's because the company's
leading market share, along with that of rival Standard &
Poor's, a subsidiary of McGraw-Hill Cos., gave the two firms
flexibility in setting prices.
Pricing Power
"I knew nothing about the management of Moody's," said
Buffett. "If you own the only newspaper in town, up until the
last five years or so, you had pricing power and you didn't have
to go to the office."
A dominant position can't prevent a bad manager from
destroying a company over time, said Benjamin E. Hermalin, a
professor of economics at the University of California,
Berkeley's Haas School of Business.
"If you have a really dominant position you can survive
for quite a long time with bad management but eventually it will
catch up to you," said Hermalin. "In the short run I would
agree with Buffett but in the longer-run perspective there is
something to be said for having a good manager."
Burlington Northern Santa Fe, the railroad Buffett bought
last year for $26.5 billion, owns more than 30,000 miles of
track across the U.S. West connecting producers and distributors
of coal, grain and consumer goods. Omaha-based Berkshire's power
company, MidAmerican Energy Holdings Co., sells electricity to
homes in the Great Plains and transports natural gas from
Wyoming to California.
Praise From Buffett
Buffett routinely singles out and praises managers from
Berkshire's more than 70 operating companies. MidAmerican
Chairman David Sokol and Gregory Abel, the unit's CEO, are "two
terrific managers," Buffett said last year in his letter to
shareholders. The acquisition of Burlington Northern had the
"additional virtue" of bringing the railroad's CEO, Matthew
Rose, to Berkshire, Buffett said.
Buffett criticized Kraft Chief Executive Officer Irene
Rosenfeld last year for her takeover of Cadbury Plc and the sale
of the foodmaker's pizza brands. "Both deals were dumb,"
Buffett told Berkshire investors in May. Berkshire is the
biggest shareholder of Kraft with a stake valued at $3.3 billion
at the end of December.
"In the short run, good management can make a stock pop
but I follow what Warren's saying, especially because his point
of view looks at the fundamentals," said Terry Connelly, dean
of the Ageno School of Business at Golden Gate University in San
Francisco, and a former managing director at Salomon Brothers.
"Good management can't do anything with a bad case."
For Related News and Information:
Government rescue programs: RESQ <GO>
Berkshire's equity holdings: BRK/A US <Equity> PHDC5 <GO>
Buffett-related audio & video: BRK/A US <Equity> TCNI AV <GO>
More on Buffett: BIO WARREN BUFFETT <GO>
--With assistance from April Lee and Noah Buhayar in New York.
Editors: Dan Reichl, Andreea Papuc.
To contact the reporters on this story:
Andrew Frye in New York at +1-212-617-1869 or
afrye@bloomberg.net;
Dakin Campbell in San Francisco at +1-415-617-7174 or
dcampbell27@bloomberg.net
To contact the editor responsible for this story:
Dan Kraut at +1-212-617-2432 or dkraut2@bloomberg.net
Rick Green at +1-212-617-5804 or
rgreen18@bloomberg.net
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