Thursday, December 27, 2007

Buffett Buys $4.5B Stake in Marmon, His 'Bet on America'

Warren Buffett's Company to Pay $4.5 Billion for 60 Percent Stake in Marmon Holdings Inc.

Warren Buffett's investment company announced Tuesday it will pay $4.5 billion for 60 percent of Marmon Holdings Inc., a private company of more than 125 manufacturing and service businesses.

Berkshire Hathaway Inc., based in Omaha, Neb., said it plans to acquire the remaining 40 percent of Marmon over the next five to six years depending on future earnings of Marmon, according to a statement released Tuesday by both companies. Marmon is owned by trusts for the benefits of the Pritzker family of Chicago, the family that developed the Hyatt Hotel chain.

The deal is expected to close in the first quarter of 2008. Before the closing, Marmon said it will make a "substantial distribution of cash and certain assets to the selling shareholders," according to the statement.

Brothers Jay and Robert Pritzker acquired Marmon in 1953 when it was a small manufacturing operation in Ohio, according to the release. In 2002, Jay's son Tom Pritzker took over as chairman.

"Our transaction was done just the way Jay would have liked it to be done -- no consultants or studies," Buffett said in the statement. "I am pleased that over the next five to six years, we will be partnering and working ... in continuing to build Marmon."

Buffett, Analysts Say Berkshire Hathaway's $4.5B Marmon Buy Is Vote of Confidence for US

When tycoon Warren Buffett's investment company said on Christmas Day it would pay $4.5 billion for a 60 percent stake in industrial conglomerate Marmon Holdings Inc., he gave the U.S. industrial segment a much-needed vote of confidence.

Marmon has more than 125 manufacturing and service businesses and is owned by trusts of the Pritzker family of Chicago, which developed the Hyatt Hotel chain. The company has its collective hands in businesses across the transportation, energy and construction markets, with products ranging from railroad tank cars to metal fasteners.

"(The deal) is most certainly a vote of confidence for 'nuts and bolts' businesses," said Steven Kaplan, a professor of finance at the University of Chicago Graduate School of Business. Marmon was brought into the Pritzker family by brothers Jay and Robert in 1953, who saw opportunity in the small manufacturing operation in Ohio. Since that time it has grown into a conglomerate that boasted 2006 revenue of about $7 billion.

Thomas Russo, a partner and portfolio manager at Lancaster, Pa.-based hedge fund Gardner Russo & Gardner, said that an investment in an American industrial company will benefit Berkshire, as more companies flock oversees to do business more cheaply. "Through more industrial development going overseas, America has left itself rather vulnerable," Russo said. "And when you get the chance to grab onto a company that offers indispensable technology and can serve a customer's needs quickly, you may actually have quite a competitive advantage."

Berkshire's more than 60 subsidiaries range from insurance to clothing, furniture, restaurants, natural gas, candy companies and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co. and Anheuser-Busch Cos.

Many of Marmon's businesses overlap those of Berkshire, Russo said, allowing it to strengthen its roots and focus on more acquisitions within its respective sectors. The Marmon deal marks Berkshire's largest ever outside of the insurance industry. Marmon did not immediately return a call seeking comment Wednesday.

The deal will follow Buffett's traditional hands-off approach to acquired companies. Marmon's management team will remain in place and the remaining 40 percent stake in the company will be taken by Berkshire over five to six years, with the price based on Marmon's future earnings.

"It is very typical of his investment strategy," the University of Chicago's Kaplan said. "He buys businesses that he can understand, that are profitable and generating cash, and that is true of Marmon. He also looks for good management teams that he doesn't have to tinker with. He buys businesses that have staying power, puts in good management and lets them do their jobs."

The acquisition, pending regulatory and other approvals, is expected to close in the first quarter of next year. At that time, Berkshire said Marmom "will make a substantial distribution of cash and certain assets to the selling shareholders."

Russo said a company's culture is key to Berkshire, and that Buffett may allow the Pritzker family to retain a stake in the company to provide a further incentive for future performance. Russo noted Berkshire followed this model is its acquisition of Shaw Carpet and Nebraska Furniture Mart. "The culture gives (Marmon) an advantage over all other sellers," Russo said. "Because if you buy a company with a bad culture, or bad management, it's not going to work."

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