By Ronald Chan (CNBC)
During the late 1990s, a stock market bubble was in the making. In addition to Internet stocks, energy stocks also soared to sky-high levels. Hindsight has revealed that many of these companies were cooking the books and telling elaborate stories to investors. David, in contrast, had the self-discipline to remain calm and not make foolish investment decisions.
Being out of step with the times, however, has consequences. “We were by any measure a large company at that point,” David explained. “We were generating solid profits every quarter, and we looked at our business in a risk-weighted way. Our stock was rising, but our peers were doubling and tripling theirs. Analysts became critical of us because our stock was lagging behind.”
Stock analysts recommended that David adopt a more short-term perspective, complaining that the company’s projects were too long-term oriented: “One analyst said to me that we needed more ‘deal velocity.’ He explained that our peers, including Enron, were making two to three deals a month, but we were only making one or two a year. In the end, I was just fed up.”
By 1999, David could no longer bear the shortsighted nature of the investment community. His mounting frustration, and a family tragedy (his son, David Jr., had just succumbed to cancer), prompted David to consider ceasing to play the analysts’ game by taking the company private. He set up a special board meeting to discuss the possible privatization of MidAmerican and carefully laid out his reasons for doing so.
“We came up with a leveraged-buyout plan in which the management team would take over the company with debt,” David explained, “but this would naturally force us to break the company apart and hurt our employees. We did not want that, so I phoned Walter for advice. Coincidentally, he was with Warren Buffett in California at the time and said he’d ask Warren if he was interested.”
The following week, David, Scott, and Buffett met. After just an hour together, a deal was struck. On October 25, 1999, Buffett’s Berkshire Hathaway announced the acquisition of MidAmerican Energy Holdings Company for $35.05 a share, valuing the company at roughly $2 billion.
“Selling MidAmerican to Berkshire Hathaway is the best decision I have ever made in my career,” David exclaimed. “Dealing with the two most important men in Omaha – Walter Scott Jr. and Warren Buffett — I am constantly reminded of their business virtues.”
Of Buffett, David said: “He has both breadth and depth of knowledge. He understands all sectors of business, and understands the logic behind each. Sometimes he sounds like he does not know much about the technical issues of a sector because he isn’t actively engaged in it. But he actually knows a lot because he reads so much, and he has the ability to put all of his research and information together to come to rational decisions.”
Having been associated with Buffett for over a decade now, David has become even more disciplined in his work: “What I have learned from Warren is that one should never bring emotion to a decision. Business decisions should always be based on facts, data, and circumstances. You can be an emotional person, but your business decisions must be based on fundamentals, because a business is only worth so much, and emotion can crowd out your business judgment. In Warren’s words, ‘you have to be disciplined enough not to swing at every pitch!’”