Berkshire Hathaway Inc. (BRK.B): A Buffett History Lesson

On this day in economic and business history…

“A policy row caused by the infusion of outside money into Berkshire Hathaway Inc. (NYSE:BRK.B) rocked the 76-year-old textile company today and resulted in the resignation of two top officers.” This brief New York Times introduction to the events of May 10, 1965 was the first time the world got to know Warren Buffett, majority owner of Berkshire Hathaway. The 35-year-old Buffett had held a large stake in Berkshire Hathaway Inc. (NYSE:BRK.B) since 1962, and made a proclamation he would soon regret (and walk back) once becoming majority owner: “We’re going to continue to sell the same goods to the same customers.” The early Buffet-era Berkshire investors are undoubtedly very, very glad he didn’t keep that promise.

At the time, Berkshire Hathaway Inc. (NYSE:BRK.B) was headed for annualized revenue of $51.2 million, with an expected profit of roughly $3.4 million. Four and a half decades later, Berkshire was a behemoth with $136 billion in revenue and $13 billion in profit. On the day Buffett gained majority control, one of the now-legendary Berkshire Hathaway Inc. (NYSE:BRK.B) Class A shares (which was the only share class available at the time) could be had for $18. Those shares grew through 45 years of Buffett stewardship to become worth $117,290 — representing an annualized growth rate of 21.6%. Nine shares, worth just $162 in 1965, would have made you a millionaire. Compare that to the performance of the Dow Jones Industrial Average over those 45 years: the index closed at 931 points on May 10, 1965, and ended up at 10,785 points in 2010, for an annualized growth rate of just 5.6%.

Wasted youth
Excel Communications, founded in 1988, became the youngest company ever to join the New York Stock Exchange when it went public on May 10, 1996. The company, operating as a multilevel marketer reselling long-distance minutes from Frontier Communications Corp (NASDAQ:FTR), was priced at $15 per share but closed at $29.38, a near-double that earned the company a $3.2 billion market cap. In its previous fiscal year, Excel earned $507 million in revenue, but its reported $45 million profit was called into question by analysts who mistrusted the company’s deferment of many millions in expenses.

Excel became the youngest company to earn a billion dollars annual revenue that year, and was also considered the fourth-largest long-distance carrier by the end of 1996. But the flaws in its business model became too great to ignore as more Americans shifted their calling preferences to mobile phones. Profits plummeted, and after the turn of the century Bell Canada, a major shareholder, acquired full control. Excel became a Bell Canada subsidiary, but was quickly spun off as a new privately held company, only to have this new corporate parent file for bankruptcy in 2004. After emerging from bankruptcy, the former Excel was eventually acquired by another privately held telecom provider. It wasn’t the first or the fastest to go big and then go bust, but Excel’s story highlights the risks any investor takes in buying up shares based on a very brief history of meteoric growth.