Less than a fortnight after criticizing fund directors for failing to protect shareholders from fund advisors, Warren Buffett
has become a fund advisor. At least indirectly.
Monday Buffett's Berkshire Hathaway joined White Mountains Insurance Group and a number of other investors to purchase a 24 percent stake in Safeco Corporation's life and investments business. The $1.35 billion deal includes Safeco's mutual fund, retirement services business as well as its group and individual life and structured settlement lines.
White Mountains and Berkshire Hathaway are each investing $200 million in a newly formed acquisition company that will be capitalized with equity of approximately $1.0 billion. The acquisition company also has secured committed bank financing of up to $350 million. White Mountains and Berkshire Hathaway will own equal shares of the firm.
Other investors in the group include, Caxton Associates, L.L.C., Highfields Capital Management, Och-Ziff Capital Management, Vestar Capital Partners, DLJ Growth Capital Partners, L.P., CAI Capital Partners and Company III, L.P., Fairholme Capital Management and Prospector Partners.
The transaction to close during the third quarter of 2004 pending regulatory approvals and other customary closing conditions.
Safeco put the unit on the block as part of an effort to focus its resources on the property and casualty insurance market. The buyers said that Safeco President Randy Talbot and his management team will continue to run the business following the acquisition. Buffett is known for leaving management teams and business strategies in place following acquisitions.
For Buffett, the deal means that investors will be able to see if he walks the walk as well as he talks the talk.
In his annual report
released nine days ago, Buffett cited the "lapdog behavior" of fund directors as an example of the reasons an epidemic of greed and corporate misbehavior took hold in the 1990s.
He also observed that none of the directors of "looted funds" terminated their contract with the offending management company in cases where improper trading is alleged to have taken place.
"Can you imagine directors who had been personally defrauded taking such a boys-will-be-boys attitude," he wrote.
He also condemned one "miscreant management company: that put itself up for sale "undoubtedly hoping to receive a huge sum for 'delivering' the mutual funds it has managed to the highest bidder among other managers."
Although Buffett did not identify the firm, it is thought that he was referring to Strong Capital, which is the only scandal-tainted firm know to be up for sale.
Buffett argued that a "truly independent director" should insist that the fund hire a new manager rather than provide a "huge payoff" to the former manager who "flouted the principles of stewardship" and therefore "deserves not a dime."
With the purchase of Safeco's fund business, Buffett will now presumably have a say in how those funds are managed. Safeco is not among the fund firms at which improper-trading is alleged to have occurred.
The annual report also sheds light on why Buffett may have joined in on the deal.
"Prior to their transgressions, it should be noted, these management companies were earning profit margins and returns on tangible equity that were the envy of Corporate America," he wrote.
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