By Dennis Berman (WSJ)
Try to imagine back to those Nixonian mists of 1973. A small Pasadena, Calif. savings and loan named Wesco Financial Corp. is about to merge with a local suitor. The deal alarms a duo of up-and-comers, 43-year-old Mr. Buffett and colleague Charles Munger, who think the $45 million offer is a rip-off.
They are invited by Elizabeth “Betty” Caspers Peters, the founder’s daughter, to break up the deal. They eventually take over Wesco themselves, accumulating an 80.1% stake.
“I liked Mr. Buffett enormously,” Ms. Peters said in an interview Monday. But Ms. Peters, who was 47 at the time of the deal, had one demand: that some Wesco shares continue to trade publicly.
Good move. Those few shares are up roughly 50-fold since early 1978, outpacing gains at both Berkshire Hathaway and the Dow Jones Industrial Average by more than three times. The old S&L is gone. Sleepy little Wesco, transformed into a collection of insurance, steel-processing and furniture rental businesses, is now worth $2.6 billion.
Today, Ms. Peters is 84 and still on the board. She is fiercely proud of Wesco, having taken it public in 1959, when, she reminds, few women ever stepped in a board room.
“Happily, I’ve been part of the ride,” she says of Berkshire.
Late last month, Mr. Buffett and Mr. Munger, Wesco’s chief executive, offered to buy out Wesco’s remaining 19.9% for roughly $500 million. Both men didn’t respond to requests for comment. Mr. Munger’s latest shareholder letter may have been the only time in history a CEO disparaged his company and its employees. “Business and human quality in place at Wesco continues to be not nearly as good as Berkshire,” he wrote.
They have priced their offer to Wesco’s 5,400 minority shareholders accordingly. They are willing only to pay Wesco’s book value, the basic calculation of a company’s assets minus liabilities.
Wesco has convened a committee of independent directors to evaluate the deal. They would be foolish to press for more, Mr. Buffett says, because they won’t get it. “No hard feelings” if directors won’t accept, he wrote.
Will Wesco ask for an improved offer, knowing that Berkshire could walk away? The answer will come in part from the woman who faced the same judgments back in 1973: Ms. Peters, now the pivotal player among the three-member independent committee. She holds about 5% of non-Berkshire shares, the third-largest bloc.
Thus sets up one of the most unlikely merger face-offs of 2010: Betty vs. Buffett.
Wesco is the oddest of ducks. It has no employees and virtually no public presence. Wesco’s primary appeal, it seems, is its annual meeting, where the cantankerous Mr. Munger holds forth on philosophy, and, occasionally, business. “We would pay to keep it public so we could continue to have an annual meeting,” says Glenn Tongue, managing partner at T2 Partners and a Wesco holder.
There is little room for sentiment in the work of special committees. They must determine whether shareholders are getting a fair, if not optimal, offer. Lawsuits await those who don’t.
Berkshire’s offer is based on Wesco’s book value when the deal closes. That value was $352 at the end of June. The stock traded at around $360 Friday, having hit $416 over the past year.
There is plenty to suggest that Wesco is indeed worth Berkshire’s offered book value. About $2 billion of Wesco’s $2.5 billion of assets is simply a pool of stocks and bonds; its main appeal is the management skill of 80-year-old Mr. Buffett and 86-year-old Mr. Munger. Wesco’s operating businesses perform meekly.
Unsatisfied shareholders will point out that Wesco has traded well above its book value at various times in the past two years. They might also argue that the company’s insurance operations, tightly aligned to Berkshire, might be better valued in line with its parent, which trades at 1.4 times book.
The market consensus is that Ms. Peters will take Berkshire’s offer. The price is “fair and appropriate,” says Mr. Tongue. “It’s not like you’re buying brand equity in this company. It has none.”
Ms. Peters won’t comment about the offer, only saying that “I believe I’m the best person on that board to represent the minority shareholders.”
So is she willing to get tough with the man whom she so admires? Politely, but firmly, she ends the phone call. She’s busy, she says, with grandchildren at her home in Napa Valley. “Right now we’re picking peaches.”