Unilever deal is dead, but Buffett's 'big game' danger lives on

Berkshire Hathaway chairman and CEO Warren Buffett is fond of referencing his "elephant gun" when hunting for acquisitions, and the latest story is that the gun misfired in the aborted Kraft Heinz-Unilever deal. The deal is being described as a flop; I'd say Buffett and Berkshire shareholders dodged a bullet.

From the moment the deal was leaked, I thought it would be a mistake for Berkshire to pursue. As Buffett continues his big game hunt, an effort made critical by Berkshire's immense cash hoard as it nears $100 billion, deals done with private equity firm 3G risk a radical break with Berkshire values. Buffett and Berkshire would be better served adhering to their traditional proven approach of buying companies by themselves in accordance with their principles, rather than teaming up with private equity players like 3G to do things using a radically different philosophy.

Warren Buffett
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Warren Buffett

This is a tension that Buffett and Berkshire shareholders will be forced to navigate as the company plans for a future beyond Buffett, with the famed investor no longer alone calling shots on billion dollar-plus acquisitions and looks to build a bigger global footprint.

3G is a private equity firm that is happy to make unsolicited bids — how it acquired Heinz and how it proposed for Kraft Heinz to acquire Unilever. Buffett always brags that Berkshire only goes where it is wanted. And as a member of the Kraft Heinz board of directors, that is likely one of the reasons why the deal was abandoned when Unilever made it abundantly clear there was no reciprocal interest.

Unilever had good reason to be wary, too.

In 2013, Heinz initially declined the 3G bid, but accepted after 3G upped from $70 to $72.50 and obtaining several promises from 3G to preserve Heinz's Pittsburgh roots and heritage, including keeping headquarters there. Those promises have been proven somewhat hollow since Heinz merged into Kraft, which is based in Chicago. That contrasts sharply with how Warren invariably keeps his promises, even if it means short-term losses. A spectacular case concerned his promise to Benjamin Moore paint dealers to sell exclusively through them, not big box retailers.

When 3G makes an acquisition, it intervenes and downsizes, the opposite of the Berkshire model. 3G's approach is that of a takeover artist and empire builder, not a product manager or developer, which is the core of consumer products companies over the long term.
Shortly after Berkshire closed on the Benjamin Moore deal, concerns from distributors starting coming in. Buffett made a video in which he expressly promised to maintain the system and not sell through big box retailers. Over ensuing years, when two successive CEOs at Moore signaled willingness to break that promise out of business necessity, Buffett intervened to remove them, citing his commitment.

"Yes, Berkshire could simply supply half the capital and cede all management and operational decisions to Jorge Lemman and the other 3Gers, and be a passive investor staying true to Berkshire values. But if Berkshire keeps going down that road, it is going to slowly sacrifice what has made it great and special."

In Heinz, the merger agreement devoted an entire section to the company's cultural connection to Pittsburgh. It declared "that after the closing, the company's current headquarters in Pittsburgh, Pennsylvania will be the surviving corporation's headquarters." A covenant, which survives the closing and is made by the acquisition vehicle Berkshire-3G jointly owned promises to preserve the company's heritage and continue to support philanthropic and charitable causes in Pittsburgh.

But within a year of the Heinz deal, the company, led by managers appointed by 3G, cut 300 jobs at Pittsburgh headquarters. A further Pittsburgh dilution occurred soon thereafter, when Heinz merged with Chicago-based Kraft to form The Kraft Heinz Company. While the company adopted dual headquarters and asserted it was keeping its Pittsburgh covenants, locals perceived a hollowing out and migration to Chicago. Then two years after that, last Friday, Kraft Heinz made an unsolicited bid for Unilever, the global giant dual-headquartered in Amsterdam and London!

Lawyers would have a field day fighting about whether either promise is enforceable, which could go either way, and ultimately hinges more on the letter of the deal than its spirit. And spirit is the key point separating the personal integrity Warren Buffett has won over a 50 year career in business from the corporate indifference one might expect from private equity takeover firms.

Something else about the Benjamin Moore-Unilever contrast is telling as Berkshire looks for an acquisition model of the future. Buffett, through Berkshire Hathaway, acquired 100 percent of Moore whereas Berkshire went in 50-50 with 3G in buying Heinz.

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Yes, Berkshire could simply supply half the capital and cede all management and operational decisions to Jorge Lemman and the other 3Gers, and be a passive investor staying true to Berkshire values. But if Berkshire keeps going down that road, it is going to slowly sacrifice what has made it great and special. Then I would worry about the Berkshire-Buffett legacy. The Unilever bid is over, but the tension between the vast personal integrity of Warren Buffett and the corporate integrity of those now running an expansionary Kraft Heinz isn't going away.

By Lawrence Cunningham, law professor at George Washington University, author of "Berkshire Beyond Buffett," and co-author of "Quality Investing." Since 1996, he has been editor and publisher of "The Essays of Warren Buffett: Lessons for Corporate America."

(This commentary is an edited and condensed version of two posts Cunningham published on LinkedIn over the past few days covering the initial Kraft Heinz bid and the history of the Benjamin Moore deal.)