Buffett's Negotiating Secrets

Berkshire '09 Annual Letter -- Part Two

For investors, perhaps the most tantalizing -- and useful -- part of Warren Buffett's 2009 letter to shareholders is a little tidbit that's appended to the end.

Actually, it's a solicitation, addressed to perhaps a few hundred people in the world.

Who? People who run or have large minority stakes in a specific kind of company. One that Buffett might want to buy next.

Specifically, the desired company should have: a market value of $5 billion to $20 billion, ballpark; top-flight management in place; and be able to earn more than $75 million annually pre-tax, through "thick and thicker," as Buffett might put it.

Buffett also stipulates two negotiating prerequisites: 1) the Seller must have a firm selling price -- and be able to deliver it (thus, no consultants or other go-between's; only principals need respond); and 2) there must be no other suitors -- no auctions.

Buffett's Negotiating Secrets

What can Buyers learn from Buffett? Three things:

One. Never negotiate against yourself.

That's what you do when you open negotiations by announcing what you're willing to pay -- as opposed to insisting that the Seller announce its selling price (and indeed, commit to being sold).

Two. Never negotiate against other would-be suitors. That's what an auction is.

Buffett doesn't do auctions because he knows that a skillfully run auction will raise the price (savvy home sellers and their Realtors know that, too!).

One of two things happens in an auction (at least when the prize is gold, not dross).

Either you prevail, in which case you'll likely have overpaid.

Or you lose, in which case, you'll just have helped drive up the price the winning bidder paid.

No thanks.

So why would a choice, up-and-coming company -- and Buffett doesn't covet any other kind -- pass up the opportunity to "play the field?"

Several reasons, actually.

Berkshire Hathaway is like a beneficent -- and distant -- ruler. A very rich and patient ruler, with an unusual commitment to building long-term value and actually investing and creating capital, not sucking it out.

For an ambitious and capable manager, there are worse places to be than part of Berkshire Hathaway's corporate fold.

Oh . . . and negotiations will be simple, quick, and painless (Buffett doesn't do hostile deals). And cheap! (remember, no go-between's). That's actually Lesson #3 -- "keep it simple and friendly" -- for anyone who is counting.

"We can promise complete confidentiality and a very fast answer — customarily within five minutes — as to whether we’re interested," Buffett promises.

I'll bet Buffett gets two corporate takers by this July 1 -- three if the market's down significantly before then (Berkshire's pretty good shelter in a storm).