A History of Berkshire Hathaway

Part 1: the years before Warren Buffett

We all know that the prime investment vehicle for Warren Buffett is Berkshire Hathaway, situated in Omaha, Nebraska, but what is Berkshire Hathaway and how did Buffett get involved?

The Hathaway Manufacturing Company was started in 1888 by Horatio Hathaway, a China trader, with profits from whaling in the Pacific. The business of the company was to mill cotton and it made big profits until the start of the decline of the cotton industry after World War 1.

Seabury Stanton, who put much of his own money into the company to keep it going, ran it during these years.

After the Depression, the company once again came into boom years, with off years from time to time. In the 1950s, Stanton decided to merge the company with Berkshire Fine Spinning Associates Inc, a milling company that had operated since the early 19^th century.

The merged company was huge, with 15 plants, over 12000 employees and revenue of over 120 million dollars. Its headquarters were in New Bedford.

Seabury Stanton was a miller and a manager with the overriding aim of keeping the business going but he was not a financial expert and he continued to plough back most of the company’s earnings into working capital, despite ever decreasing cotton prices, resulting from increased competition at home and abroad.

There was internal division in the company between the old stylers and those who wanted to get involved in emerging products.

By the end of the 1950s, the company had closed seven of its plants and laid off a large number of workers. Its stock price had fallen and many analysists had written it off.

In 1962, Buffett started to buy shares in the company, believing that its then price was substantially below its intrinsic value. By 1963, Warren Buffet and his associates were the largest stockholders and Buffett began to take a more active interest in the company. There was increasing dissension between him and Jack Stanton who had taken over the leadership of the company from his father.

Buffett gradually increased his shareholding to 49 per cent and used his votes to change the management of the company. He became Chairman of the executive committee and installed Ken Chace as President to run it. Buffett would leave the milling operations of the company to the new President; he would concern himself with the financial structure of the company.

It is interesting to see that, even at this stage of his life, Buffett would not entertain a stock option package for the executive team. He was prepared to pay good salaries with incentives, provide loans to allow executives to buy shares in the company, but no stock options. There was to be no free ride for the management team.

By now, the shares that Buffett had bought at an average cost of about $15 were worth $18 a share and the company had only two operative mills left. Only 2300 employees remained.

Go to part two