(BRK.A), (BRK.B)
Questions about Brazil-based 3G Capital were much on the minds of Berkshire Hathaway shareholders at Berkshire’s annual meeting on May 2. Warren Buffett defended 3G’s cost-cutting methods as necessary to bring complacent century-old companies into the modern age.
“3G has been buying businesses that have too many people,” Buffett explained.
Over the past year, Berkshire and 3G went in together on two major deals.
On December 14, 2014, Berkshire provided key financing for the combining of Burger King International with the Tim Horton’s chain. The move was a merger that created a new company, Restaurant Brands International (QSR), one of the world’s largest quick service restaurant companies with more than $23 billion in system sales and over 19,000 restaurants in nearly 100 countries and U.S. territories.
3G Capital ended up owning 51% of the combined company and quickly installed 3G’s partner Daniel Schwartz as the Chief Executive Officer and a Director of the company.
Berkshire came out of the deal owning 68,530,939 Class A 9.00% Cumulative Compounding Perpetual Preferred Shares, and warrants to purchase 8,438,225 shares of Common Stock for a penny a piece. Berkshire later exercised those warrants for a modest 354,000% paper profit on its money.
On March 25, 2015, 3G and Berkshire announced the merger of their jointly-owned H.J. Heinz Company with Kraft Foods Group. The combined Kraft Heinz will be 51 percent owned by 3G Capital and Berkshire Hathaway. Kraft shareholders will own the remaining 49 percent. 3G partner Alex Behring will become the Chairman of Kraft Heinz. Berkshire will be the largest shareholder in Kraft Heinz.
In its growing partnership with 3G Capital, Berkshire Hathaway has found an aggressive partner that is looking to own major brands, and most importantly, to “right-size” them in the words of Charlie Munger.
Right-sizing refers to ruthless cost-cutting that cuts expenses in all areas, including laying off employees.
It’s the laying off of employees that drew questions at this year’s Berkshire annual meeting.
Counter to the Berkshire Ethos?
While some may mistakenly think Warren Buffett’s folksy persona might make him a softie when it comes to the management of companies, cost-cutting clearly is not just on the minds of 3G’s partners.
“You will have never found a statement from Charlie or me saying that a business should have more people than needed,” Buffett said at the meeting.
Charlie Munger compared the employment of excess personnel to the full employment guarantees in the former Soviet Union, where, as he quoted the old Russian saying, “We pretended to work, they pretended to pay us.”
Buffett went on to point out that Berkshire’s own strategy is to make sure its companies do not have excess employees, and as he joked about companies in general, “Any company that employs an economist has one employee too many!”
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.