An underrated advantage of Berkshire Hathaway is that Warren Buffett is able to buy family-owned companies at a discount to the maximum value that an open bidding for the company would yield. Buffett is able to secure 5% to 20% discounts on fair market value because he is able to guarantee that the legacy and special cultural factors of the business will remain intact after he takes over. Given that founders often infuse part of their identity into their businesses, this maintenance of tradition makes Berkshire more attractive than a cost-cutting private equity fund that will immediately try to wring out more profits to pay down the leverage that is often used to make the acquisition.
When Buffett was in Toronto back in 2008, he explained this advantage as follows: “You can sell your business to Berkshire, and we’ll put it in the Metropolitan Museum. It’ll have a wing all by itself. It’ll be there forever. Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll put some lipstick on it and he’ll stick it up in the window. And then some other guy will come along in a raincoat, and he’ll buy it.”
If founders are sentimental about their brick and chemical businesses, imagine how much more sentimentality applies to creative media works that actually relied upon the business founder’s artistic expression to drive growth. Most likely, The Walt Disney Company enjoys a similar type of competitive advantage when it comes to the acquisition of other entertainment companies. If you’re concerned about the characters of your imagination lasting fifty years from now, I can’t think of any entity that has a better chance of carrying out that objective than Disney.
In 2012, Disney made an acquisition of LucasFilms for “only” $4 billion. Because the Star Wars franchise has now generated $2 billion in profit in the four years since making the acquisition, many casual commenters are observing that Disney got a steal of a deal.
That is true, but it shouldn’t lead to an accompanying observation George Lucas was foolish for selling his business. He knew exactly what he was doing. He knew that he wasn’t going to do any more Star Wars movies. But he also knew that a Disney acquisition would provide the greatest opportunity to burnish his legacy. Disney has vast institutional resources that permit the firm to treat its intellectual property like–in the words of Charlie Munger–an oil well that can get drilled again and again each generation. Instead of trying to maximize LucasFilms by selling it for $6 billion, he took a bit less in order to sell to the corporation most able to nurture his artistic creations.
Just as Berkshire Hathaway functions as a long-term consolidator of industrial and consumer brand businesses, Disney stands to fulfill the role of preeminent media industry/creative intellectual property consolidator. The advantage of lucrative intellectual property is that you can earn 30% to 50% profit margins because the input costs are de minimis compared to the final retail price that the consumer pays. I dog on Disney from time to time for the performance of its ESPN subsidiary, but the media empire is so vast and lucrative otherwise that it still holds a spot on my list of twenty best publicly traded businesses in existence.