VENEZUELA'S ECONOMY
Venezuela's economy
A funny way to beat inflation
Hugo Chávez invites the private sector to help him build socialism
TO BUILD his promised socialist revolution, Hugo Chávez seems to have concluded that he needs the help of capitalist businessmen. Earlier this month he invited a handpicked group of captains of finance and industry to the presidential palace. He lectured them about the imminent demise of capitalism, but then proceeded to offer them cheap credit and joint ventures to “reactivate” production.
That such efforts are needed is at first sight odd. Although it sells at a discount because much of it is heavy and sulphurous, the price of a barrel of Venezuelan oil recently topped $120. This year, Mr Chávez says, oil will contribute $75 billion to government revenues, up from $43.5 billion last year and only around $7 billion when he came to power in 1999.
Nevertheless, the economy slowed sharply in the first quarter of this year (see chart). That came as a surprise to the planning ministry, which had forecast growth of 6.7%. To make matters worse, the government's inflation forecast of 12% for this year has proved even more wildly optimistic. This is particularly bad news for the poor, Mr Chávez's main constituency. The price of food is rising faster than the overall index. According to the Centre for Documentation and Analysis (CENDA), a group linked to the trade unions, the cost of feeding a family of five rose by 2.4% in May and stands some 60% higher than the minimum wage, even though this was recently increased. For the first time in the past three years, the living standards of ordinary Venezuelans are declining.
After losing a referendum on constitutional change last December—Mr Chávez's first electoral defeat—the government has made efforts to tackle the sources of popular discontent, including food shortages. It has used its oil wealth to import more food. But as fast as one gap is plugged another appears. CENDA reports that staples such as black beans, rice, maize flour and meat were missing from the shelves of many shops in May. Butchers have staged protests, complaining that price controls oblige them to sell some cuts below cost. The government's consumer watchdog accuses them of hoarding and speculation, complaining that they are selling under the counter to restaurants at a higher price.
Officials rightly point out that the shortages arise partly because Venezuelans are consuming more. But they also reflect big economic imbalances. The government has channelled much of its oil wealth into handouts and subsidies, while its socialist policies have provided little incentive to increase production. Private investment has all but dried up. Businessmen have been scared by Mr Chávez's recent nationalisations of the cement and iron and steel industries, and some dairy companies. Most industries are producing “at the limit” of their capacity, admits Andrés Izarra, the information minister.
The president has tacitly recognised the problem. As the inflation rate climbed above 3% a month late last year, he silently applied the brakes: the government raised interest rates and slowed the rate of increase in public spending. It also managed to narrow the gap between the official exchange rate and the price of the dollar in the free market. It did so partly by stepping up the sale of bonds, which can be legally traded for dollars, but it helped that political tension subsided somewhat after the referendum.
The government's new-found appetite for austerity has strict limits. In November Mr Chávez faces regional elections which many Venezuelans will see as an unofficial referendum on his rule. He has made it clear that he will not cut social spending. There is little sign that the private sector will respond to Mr Chávez's appeals to help to build socialism. All this suggests that the battle against inflation will be hard. To wage it, the president this week named as his finance minister Alí Rodríguez, a veteran official who has close ties to Cuba, Venezuela's closest ally. Perhaps he has noticed that Cuba's communist government has recently concluded that private farming, rather than socialism, is the best way to feed the people.
ZIMBAWE'S TRAGEDY
Zimbabwe
Zimbabwe's tragedy and farce
What next after the opposition leader, Morgan Tsvangirai, pulls out of the run-off election?
A PROLONGED and orchestrated campaign of state-sponsored violence has finally forced the opposition in Zimbabwe to pull out of the presidential run-off that is scheduled for Friday June 27th. Despite repeating to the last minute that withdrawal would not happen, the Movement for Democratic Change (MDC), led by Morgan Tsvangirai, says it will not take part in “a sham of an election process”. Mr Tsvangirai, explaining his decision, says that he could not ask Zimbabweans to cast their vote “when that vote could cost them their lives”. His party won the first round of the election in March, snatching a majority in Parliament from the ruling ZANU-PF for the first time ever. It also claimed to have won the presidential ballot outright, but official results called for a run-off. The president, Robert Mugabe, has vowed to hold on to power until “God” tells him otherwise.
The MDC has been the victim of increasingly brutal retaliation since March. Many rallies have been banned, making it difficult to campaign. A court overturned a police ban and allowed the opposition to hold a rally in Harare, the capital, on Sunday. But pro-government youth militias, young men armed with iron bars, blocked access to the grounds where the rally was to take place, beating people who tried to gather. Mr Tsvangirai has been detained several times while on the campaign trail. Tendai Biti, the MDC's secretary-general, has been jailed, charged with treason and denied bail. The party says that over 2,000 opposition supporters, including polling agents, are being detained illegally.
The opposition reports that over 80 supporters have been killed since March, 10,000 people injured, twice as many homes destroyed, and over 200,000 displaced by the violence. Perhaps as a result, Mr Tsvangirai appears to have no clear plan of what to do now. He wants the region and the UN to intervene to restore peace and conditions for a free and fair election. Zimbabwe’s authorities say they will go ahead with the poll. In theory, Mr Tsvangirai’s bowing out of the race means another five-year term for Mr Mugabe.
Mr Mugabe may yet struggle to get away with murder. At least some in the region, which for so long let Mr Mugabe steal elections and refused to criticise him, are at last speaking out. After Mr Tsvangirai said he was pulling out of the election, Zambia’s president, Levy Mwanawasa, said that it was “scandalous” for the Southern Africa Development Community (SADC), a club a 14 countries that he chairs, to remain silent on Zimbabwe’s crisis. He added that the stance was embarrassing and called for the poll to be postponed to avert a catastrophe. Ban Ki-moon, the UN secretary-general, issued a statement supporting Mr Mwanawasa. The regional bloc has been divided over how to deal with the situation, with Zambia, Botswana and Tanzania showing growing signs of impatience. Even Angola, a long-time ally of Mr Mugabe, which will hold its own elections in September, has advised the Zimbabwean president to stop the violence.
A host of prominent African leaders have said out loud that the election had no chance of being free and fair. South Africa’s President Thabo Mbeki, whom the SADC asked last year to mediate between Zimbabwe’s opposition and ruling party, was in Harare last week in an attempt to have both sides talk. Even now that Mr Tsvangirai had thrown in the towel, Mr Mbeki, who refuses to stand up to Mr Mugabe, is still hoping for a negotiated solution. The UN Security Council will discuss the situation on Monday, unless South Africa, which has a seat on the council at the moment, again blocks talks.
So far, Mr Mugabe does not seem to care. He has made it clear he would never allow the opposition to take over, and refuses to meet Mr Tsvangirai. As Mr Mugabe and his supporting generals act more flagrantly, his neighbours face a greater test. Faced with hair-raising brutality, a blatant disregard for democracy and a country in economic ruins, the region, long paralysed by divisions and misplaced loyalty, will come under more pressure to act.
MEXICANS TAKING BACK LAND?
June 25 (Bloomberg) -- More than a century and a half after Mexico lost Texas to the U.S., Virgilio Garza wants a piece of it back.
A ``Texas for Sale'' sign and cowgirls in boots and white hats greeted Garza at the Convex center in Monterrey, Mexico, earlier this month. A Monterrey developer and investor, Garza was in search of foreclosed U.S. property to buy.
``Texas is like our home,'' said Garza, 45, who joined hundreds of Mexicans poring over lists of Texas properties at the four-day event. Garza, who owns manufacturing sites and other land in Mexico, said he and five partners may invest as much as $8 million in Texas. ``We believe there can be some opportunities.''
A rising peso and an economy growing faster than the U.S. have given some Mexicans the buying power to take advantage of the housing slump in Texas, which the U.S. annexed in 1845 after Texans gained independence from Mexico nine years earlier. A three-year war followed and ended with Mexico ceding about half its territory, including Arizona, Nevada and California, to the U.S. under an 1848 treaty.
The peso has gained 5.9 percent against the dollar since the beginning of the year. The Mexican currency today was little changed, slipping less than 1 centavo to 10.2952 pesos per dollar at 9:43 a.m. New York time. The economy, which rose 2.6 percent in the first quarter from a year ago, is expected to grow 2.6 percent this year, according to a central bank survey of 31 economists in May. The U.S. economy is forecast to grow 1.4 percent in 2008, according to a Bloomberg survey of 57 economists.
Marco Ramirez of McAllen, Texas, is among those trying to sell foreclosed Texas homes to Mexicans. Ramirez's company, called Now! Co., has bought 32 Texas properties and has options on 88 more. His best prospects are Mexican buyers, especially in Monterrey, 150 miles from the Texas border, he said.
`Great Time to Buy'
``Many of these people have children who are studying in the U.S.,'' Ramirez said. ``They've been renting or leasing and now it's a great time to buy.''
Mexico is better known for providing the U.S. with cheap labor than investment. The U.S. is home to an estimated 12 million Mexican-born residents, about half of them living there illegally, according to the Pew Hispanic Center in Washington.
Sales of existing U.S. homes in April fell 18 percent to an annual pace of 4.89 million from 5.93 million a year ago as banks shied away from making new loans, according to the National Association of Realtors in Washington.
Rising Foreclosures
The slump in demand pulled down the median price of an existing U.S. home in April to $202,300 from $219,900 a year ago, according to the association.
While Texas hasn't been hit as hard as California and Florida, where the housing boom drove up prices the most, existing home sales in Texas fell 12 percent from a year ago in the first quarter.
Foreclosures in Texas rose 29 percent in the first quarter from a year earlier, with one of every 274 households in the foreclosure process, according to RealtyTrac Inc., a seller of default data based in Irvine, California. The Texas foreclosure rate ranked 17th in the nation, according to RealtyTrac.
Garza and other Mexicans with money to invest believe the time is right to buy, Ramirez said. ``These are very sophisticated businessmen,'' he said. ``They realize what's going on in our country. Everybody needs cash right now and Monterrey has lots and lots of cash.''
Victor Gonzalez, 48, who owns a Monterrey print shop that employs 40 people, wants to use his savings to buy a $250,000 house in a gated community in the South Texas community of Mission.
`Ready to Go'
``This is exactly what we've been looking for,'' said Gonzalez, who was wearing a black Harley-Davidson T-shirt. ``We're ready to go.'' He said the price is $50,000 less than he expected he would have to pay.
Gonzalez said he plans to turn over the shop to his children in five years and retire to Mission, where the traffic is lighter and the crime rate lower.
The only requirement for foreigners purchasing residential and commercial property in the U.S. is a valid visa to enter the country, said Jose Cuellar, a realtor with Houston-based Cornerstone Mortgage Co. who caters to Mexican clients.
Raul Fabela, owner of McAllen, Texas-based Construction, Ltd., came to Monterrey looking to sell 42 rental properties of four apartments each, double his normal inventory of available properties. U.S. buyers have dried up, he said.
Mortgages Scarce
``We've had a slowdown since October,'' said Fabela, whose company builds rental properties and luxury homes priced at more than $1 million, said. ``I can't find mortgage companies that want to finance at 10, 15 percent down.''
He said 26 people filled out credit applications in Monterrey. ``It turned out a lot better than we thought.''
For Garza, the U.S. real estate slump has opened the door to diversifying his holdings. Garza's company, Grupo Vigia, owns five industrial parks and 600 hectares (1,483 acres) of land earmarked for housing development near Monterrey.
``We think there's opportunity to buy right now at reasonable prices,'' Garza said. ``We want to keep the properties two or three years until the market turns around and then begin to develop them.''
WARREN BUFFET
By Richard Teitelbaum
June 25 (Bloomberg) -- Warren Buffett is in Toronto, fielding questions from a crowd of 300 executives. One asks what makes people want to sell their companies to him.
The Berkshire Hathaway Inc. chief executive officer replies that he tells a prospective seller to think of the company as a work of art.
``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting. ``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''
Buffett, 77, can afford to throw a little mud on his competitors in the private equity industry. Wall Street's acquisition machine has seized up, while Buffett, in the valedictory chapter of a career stretching back more than 60 years, is on a buying spree.
He has $35.6 billion in cash to spend, and he's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts, products with strong market positions or other competitive advantages.
Buffett's biggest catch so far in 2008 was Marmon Holdings Inc., a conglomerate owned by Chicago's Pritzker family. On March 18, Berkshire announced it had bought 60 percent of Marmon from the Pritzkers for $4.5 billion. Buffett is buying the rest in increments during the next five to six years.
Needle-Moving Events
In April, he agreed to pay $2.1 billion for an undisclosed stake in Chicago's Wm. Wrigley Jr. Co. as part of McLean, Virginia-based Mars Inc.'s $23 billion purchase of the gum maker. Buffett, who already owns See's Candies, is helping to fund the deal with $4.4 billion in subordinated debt.
``This is the kind of market where you would expect the pace of Berkshire acquisitions to pick up,'' says Keith Trauner, senior analyst of Fairholme Capital Management LLC in Short Hills, New Jersey. ``In a weaker business environment, sellers moderate their expectations.''
At the same time, Berkshire is now so big that Buffett is having a hard time turning acquisitions into growth. Most of Berkshire's more than two dozen purchases since 2000 are too small to have much impact. ``The larger the company becomes, the harder it is to find needle-moving events,'' Citigroup Inc. analyst Joshua Shanker says.
Buffett agrees. ``Anyone who thinks we will come close to repeating our past performance should sell their stock,'' Buffett told investors at Berkshire Hathaway's annual meeting in May. He declined to comment for this story.
Affinity for Insurance
The Sage of Omaha, by his own count, now owns 76 companies outright, a number that rises to about 200 if Marmon's 125 subsidiaries, which make everything from water treatment gear to brake drums, are taken into account. Among the Buffett companies are names familiar to most Americans: Geico car insurance, best known for the Cockney-accented gecko in its television commercials; Dairy Queen restaurants; Benjamin Moore paints; and Fruit of the Loom underwear.
Berkshire also owns 8.6 percent of Coca-Cola Co., 13.1 percent of American Express Co. and 8.8 percent of Wells Fargo & Co. Those three investments alone amounted nearly $25 billion on June 24.
Insurance firms dominate the list of Berkshire-owned companies. Buffett controls a dozen of them -- Berkshire Hathaway Reinsurance, General Re Corp. and Geico Corp. are the biggest -- accounting for 31 percent of Berkshire's 2007 revenue.
``I would say we have a special affinity for insurance,'' Buffett said at the 2007 annual meeting's news conference.
Competitive Advantage
One reason is that Buffett loves float -- the premiums collected from policy holders that can be invested at a profit until claims need to be paid. As of the end of December, Berkshire had $58.7 billion of float.
In May, an acquisition-minded Buffett took a tour of Europe -- stopping in Germany, Italy, Spain and Switzerland -- where the media and business establishment treated him like a rock star. ``I'm not looking for Pet Rock or Hula Hoop businesses,'' he said at a Frankfurt news conference. ``I'm hoping to make big deals, whether it's in the United States or Germany or Italy or Denmark.''
In Europe, Buffett repeatedly praised the company headed by the man who sat beside him during his European tour, Eitan Wertheimer, chairman of Tefen, Israel-based Iscar Metalworking Cos. Buffett bought an 80 percent stake in Iscar, a maker of metal-cutting tools, in 2006 for $4 billion, his first big overseas acquisition.
Loyal Customers
A close look at Iscar's main factory complex in northern Israel shows why Buffett took an immediate interest when Wertheimer faxed him a letter declaring that Berkshire would be an ideal home for Iscar. The company has the ``durable competitive advantage'' Buffett told the Europeans he always looks for. It's a market leader in the design and production of a variety of metal-cutting tools.
And Iscar has loyal customers. A disposable tungsten carbide insert used to slice steel can wear out in 20 minutes or less, meaning that Iscar must deliver a steady supply of new blades to every customer that uses them.
Buffett's purchase of Iscar made the Wertheimers celebrated billionaires, so it's no surprise that he receives hundreds of letters from other entrepreneurs offering to be bought out.
Among those that have made the grade in the past 10 years are: MidAmerican Energy Holdings Co., which can generate a set return on equity of 10-11 percent from its regulated utilities; electronic parts distributor TTI Inc., which has never posted an annual loss nor laid off an employee; and Business Wire, one of two companies that dominate the niche of sending news and financial releases around the world.
Quick Dividends
Becoming a Berkshire company can pay quick dividends. On June 30, 2005, Berkshire purchased Medical Protective Corp., a Fort Wayne, Indiana-based malpractice insurer, from General Electric Co. for $825 million. The next day, Standard & Poor's raised the firm's A financial rating to AAA. ``It's hard to imagine how MedPro could have done any better than being owned by Berkshire,'' CEO Tim Kenesey, 41, says.
Sometimes the benefit is more subtle. ``There's definitely a halo effect,'' says Steve McKenzie, CEO of Norcross, Georgia- based Larson-Juhl Inc., a custom picture frame maker Buffett acquired in 2002 for $223 million. ``It's realized in the higher- quality recruits we hire and in potential acquisitions' readiness to talk to us,'' says McKenzie, 46.
Buying on Faith
Buffett often decides to buy a company after what looks like a cursory examination of its operations. He agreed to purchase Larson-Juhl after a 90-minute talk with its founder, Craig Ponzio. During his European tour, Buffett told questioners that he had bought Iscar without any due diligence and after just a few days of talks with its top executives, who traveled to the U.S. three times to meet with Buffett and his investing partner, Charles Munger.
No one from Berkshire ever stepped inside an Iscar factory before the deal was done, Buffett says.
``He's buying on faith, and especially with larger acquisitions, that's certainly perilous,'' says analyst Chuck Hamilton, who follows insurance at FTN Midwest Securities Corp. ``If he were to spend $20 billion-$30 billion on a major company, without due diligence, that would really be cause for heartburn.''
With a staff of only 19 at Berkshire headquarters in Omaha, Nebraska's Kiewit Plaza, Buffett says he won't buy a company without management in place that he's sure of.
Modest Backgrounds
``We have to see it in their eyes,'' he said at the May 3 annual meeting, where 31,000 investors converged on Omaha's Qwest convention center to hear Buffett and Munger, 84, answer shareholder questions between mouthfuls of See's candies.
In the case of Victor Mancinelli, CEO of CTB Inc., a maker of poultry feeding systems and other agricultural equipment in Milford, Indiana, Buffett could see it on the balance sheet. Mancinelli had paid off nearly $80 million in leveraged buyout and other debt in just three years. Berkshire bought CTB in 2002 for about $180 million.
One quality Buffett firms usually have in common: CEOs from modest backgrounds, often without Ivy League degrees on their resumes. Mancinelli's father was a truck driver, and his mother was an autoworker.
MidAmerican Chairman David Sokol worked his way through the University of Nebraska at Omaha as a night manager at a grocery chain. TTI's Paul Andrews is a former oil rig roughneck who once sold Bibles door-to-door. Business Wire's Cathy Baron Tamraz is a former taxi driver.
Wagering Billions
Buffett is famous for his lack of pretension. He has honed the fine art of ukulele playing. He still lives in the Dutch colonial home he bought for $31,500 with his late first wife, Susan, in 1958, according to ``Of Permanent Value: The Warren Buffett Story'' by Andrew Kilpatrick (self-published, 2008).
When he eats out, it's often at Gorat's Steak House on Center Street in Omaha, where a luncheon steak will set you back $8.25 -- including soup and a side of mostaccioli pasta. Buffett personally drives visitors to and from the airport. He prefers Cherry Coke to fine wine and saves money buying it by the case.
Buffett's just-plain-folks posture is a bit of a feint. His father, Howard, was an investment banker and a Republican U.S. congressman. Warren attended the Wharton School of the University of Pennsylvania and got a master's degree in economics from Columbia University.
In terms of the businesses he buys, Buffett never tires of telling questioners that he invests only in simple, straightforward industries whose operations he can grasp. Yet he wagers billions on everything from hedge funds to junk bonds. Through December, Buffett had made $2.3 billion in pretax earnings during the past five years on foreign-exchange bets.
Put Options
And as of March, he had tens of billions of dollars riding on two kinds of derivatives -- instruments he dubbed ``financial weapons of mass destruction'' in his 2002 letter to shareholders. The first is a variety of credit-default swap guaranteeing payment on certain high-yield bonds. Credit-default swaps, which are contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Buffett also has sold put options -- contracts that provide the right, but not the obligation, to sell a security, currency or commodity at a set price within a set period -- on four stock indexes. In his 2007 shareholder letter, Buffett wrote that because Berkshire holds the cash connected to the derivatives, there is no risk the parties on the other side of the transaction won't pay.
Slow to Sell
Buffett's investment choices have yielded a conglomerate that's profitable in all kinds of weather. Through May, Berkshire's Class A stock, which traded on June 24 for $122,700 a share, has returned an average of 19.3 percent annualized in the past 20 years, nearly double the 11.2 percent return of the S&P 500 Index. From June 30, 2007, through June 24, Berkshire stock rose 12.1 percent, while the S&P 500 Index returned a negative 10.8 percent.
As of Feb. 29, Buffett himself owned 28.1 percent of the combined value of Berkshire's Class A and B shares, worth $53.44 billion on June 24. Class B shares have 1/30th of the value of Class A shares' value and 1/200th of their voting rights.
Buffett could be even richer if he had bent some of his own rules. For instance, he prides himself on buying and holding companies forever -- and is slow to sell his stocks. That has cost him and his shareholders' money. Berkshire's 8.6 percent stake in Coca-Cola was worth $17.6 billion when it hit its high in July 1998. Nearly a decade later, it's valued at just $10.67 billion -- and Buffett hasn't sold a share.
Underwriting Losses
Buffett has stumbled, most notably in 1998, when he spent $22 billion in Berkshire stock to buy Stamford, Connecticut-based General Re, one of the world's biggest reinsurance companies.
``General Re's name has stood for quality, integrity and professionalism in reinsurance,'' Buffett wrote in that year's shareholder letter. He lauded CEO Ronald Ferguson for his leadership.
Yet, as Buffett has pointed out in several annual reports since, the company was selling insurance way too cheaply. From 1999 through 2005, Gen Re ran up a total of $7.69 billion in underwriting losses. FTN Midwest's Hamilton estimates that those losses have been largely offset by investment income.
In 2001, Ferguson stepped down, replaced by executive vice president Joe Brandon. In that year's letter, Buffett compared Brandon to former General Electric CEO Jack Welch. ``He is smart, energetic, hands-on,'' Buffett wrote.
`A Sinkhole'
In 2006, prosecutors accused Ferguson, former CFO Elizabeth Monrad and two other former General Re executives of helping American International Group Inc. inflate reserves by writing sham, no-risk reinsurance contracts beginning in late 2000.
Jurors convicted all four of fraud in February, along with one former AIG executive. They are still awaiting sentencing. Two other former Gen Re executives pleaded guilty to their role in the fraud in 2005.
Buffett was interviewed by prosecutors in connection with the case. He wasn't charged with any crime. Brandon, named by prosecutors as an unindicted co-conspirator, resigned on April 14, and was replaced by Gen Re President Tad Montross.
``It's been a sinkhole,'' Hamilton says. ``Buffett's lost more than a shred of reputation.''
General Re isn't Berkshire's only regulatory entanglement. Connecticut Attorney General Richard Blumenthal said in May that he's investigating whether Moody's Investors Service, which was 19.6 percent owned by Buffett as of March 31, was guilty of a conflict of interest when it gave a AAA rating to Berkshire's new municipal bond insurance firm.
`Purse Strings'
``It is one symptom of a system rife with possible conflicts of interest and problematic relationships,'' Blumenthal said in a May 1 interview with Bloomberg News.
Buffett says his company deserves its rating. ``If Berkshire isn't AAA, I'm not sure what company would be,'' he told Bloomberg Television.
As pressure has grown for Berkshire to spend its cash, Buffett has been willing to travel farther afield in search of companies to buy, says David Carr, chief investment officer of Oak Value Capital Management Inc.
``I think in the past five years, he's loosened his purse strings,'' Carr says. ``There's nothing off limits as long as he understands the model.''
Analyst Hamilton says Buffett is finding it hard to replicate his previous returns. ``The returns on equity and capital are not what they were in years past,'' he says.
Intrinsic Value
Berkshire's growth is slowing. The annual median increase in per share book value, or net worth, averaged 10.3 percent in the eight years ended on Dec. 31, 2007, compared with 26.1 percent in the 1990s and 28.8 percent in the '80s, according to Citigroup's Shanker. He says Buffett is turning Berkshire into a conservative capital preservation vehicle.
``If you're interested in capital appreciation, you have to ask yourself whether Berkshire Hathaway is the right investment,'' Shanker says.
Buffett says there's only a limited number of good, big companies for sale at reasonable prices. As he put it in a May 2007 interview with TV host Charlie Rose, ``The real goal at Berkshire is just to keep building more and more earning power from operating companies.''
What makes Buffett want to buy? He himself says there's no secret formula, because each company's dynamic is unique. Berkshire is most active when markets go awry and companies' market capitalizations dip below their true worth -- their ``intrinsic value'' in Buffett-speak.
`Deal Velocity'
MidAmerican Energy's Sokol turned to Buffett during the stock market bubble of 1999. Investors, infatuated with Internet and technology stocks, were undervaluing the shares of relatively staid utilities such as Des Moines, Iowa-based MidAmerican, which looked especially pallid next to booming energy trader Enron Corp.
``You do two to three deals a year,'' Sokol recalls one analyst telling him. ``Your competitors are doing two to three a month; they have deal velocity.''
Shares of MidAmerican slumped to less than $27 in late 1999 from $42 in '97. ``The irrational behavior was driving me crazy,'' Sokol says.
What Buffett saw in MidAmerican was a company positioned to take advantage of utility deregulation and grow through a string of acquisitions. It now operates regulated utilities in 10 states, plus the U.K. It also owns plants in Australia and the Philippines. State regulatory commissions typically allow returns on equity of 10-11 percent.
`A Fool's Game'
``Warren thinks of our business as a good place to invest money on a long-term basis,'' Sokol says.
Sokol didn't need to join a long line of company owners trying to get Buffett's attention. One investor in MidAmerican was Walter Scott Jr., a Berkshire director and Buffett friend. He is chairman emeritus of Omaha-based construction contractor Peter Kiewit Sons' Inc.
Scott suggested the meetings that resulted in the sale. Berkshire paid $1.7 billion for 85 percent of MidAmerican. Sokol, Scott, now 77, and MidAmerican President Gregory Abel paid some $310 million for the rest.
Midamerican dips into Berkshire's till for acquisitions, while keeping true to Buffett's reputation for thrift by scooping up companies on the cheap.
``With regulated assets, overpaying is a fool's game,'' Sokol says.
Deep Pockets
In 2002, the company paid $450 million for Salt Lake City- based Kern River Gas Transmission Co. Also in 2002, it bought Northern Natural Gas Co. from Dynegy Inc. for $928 million. Dynegy had purchased the pipeline company, now based in Omaha, less than nine months earlier from a collapsing Enron for $1.5 billion.
``It was a brilliant acquisition,'' says Gordon Howald of Calyon Securities (USA) Inc. ``Using standard industry multiples, we could see these assets worth more than $2 billion in today's market.''
Sokol has kept up his buying. He paid $5.1 billion for PacifiCorp, a Portland, Oregon-based utility, in March 2006. That month, Berkshire also agreed to give him up to $3.5 billion in cash for new purchases or other purposes, in exchange for MidAmerican stock.
NetJets Inc.'s Richard Santulli also had Buffett's deep pockets in mind when he made a call to Omaha. The year was 1998, and his partner, Goldman Sachs Group Inc., which owned 20 percent of the company, was pushing for a public offering. In 1986, Santulli had invented the notion of ``fractional'' jet ownership, in which individuals and companies buy shares of a private plane's flying time in lieu of buying the entire jet.
`25-Year-Old Kids'
By 1998, several other companies, including Montreal-based Bombardier Inc. and Waltham, Massachusetts-based Raytheon Co., had crowded into the field. To keep his dominant market share, Santulli expanded both the number and variety of aircraft in his fleet.
Santulli balked at the idea of an IPO for Woodbridge, New Jersey-based NetJets because going public would subject his company to the scrutiny of Wall Street analysts. ``I wasn't going to answer to 25-year-old kids telling me how to run my business,'' he says in his thick Brooklyn accent.
Like Sokol, Santulli had ready access to Buffett, who was a customer and had told him in the past to give Berkshire a call if he ever wanted to sell. Less than a week after he made the call, Buffett picked Santulli up at Omaha's Eppley Airfield in his Town Car and took him to his office. ``The deal was done in 5 minutes, maybe 10 minutes,'' he says. Berkshire paid about $725 million in cash and stock.
Expanding to Europe
Berkshire not only bankrolled NetJets' fleet of Boeings, Citations and Gulfstreams, it also underwrote the company's expansion to Europe. From 2000 to '05, NetJets lost $212 million building up a European fractional jet ownership program. ``If I were public, I would have had to close the European business down,'' Santulli says, adding that today the unit is profitable.
``If I were to sell that business -- which of course we're not -- I would start at more than a billion and go from there,'' he says. According to Jetnet LLC, a Utica, New York-based research firm, NetJets now has more than 50 percent of the U.S. fractional jet market and virtually no competition in Europe.
Business Wire's Tamraz, 54, had no special entree to Buffett's office when she faxed him a letter, along with financial data, in November 2005. Eight days later, her receptionist buzzed her.
``Warren Buffett's on line 2,'' she said.
``Hello, Mr. Buffett,'' Tamraz said, as she scrambled to find her copy of the letter.
``Call me Warren,'' he responded.
Job Security
Tamraz says Buffett asked for more financial information on New York- and San Francisco-based Business Wire and for an idea of the price she was asking for the enterprise.
What appealed to Buffett about Business Wire was its business model, Tamraz says. The firm, founded in 1961, delivers 250,000 news releases a year for 25,000 corporate clients around the world. In 2007, it had more than $125 million in sales, which have been growing about 8 percent a year for the past three years, according to Tamraz.
One reason: Regulation Fair Disclosure, a U.S. Securities and Exchange Commission rule implemented in October 2000 that requires companies to disclose market-moving information to all investors simultaneously.
Tamraz is thrifty. She has no secretary and decorates her office with posters. She's been known to pitch in to format press releases when earnings season picks up. Another feature Buffett liked is that Business Wire has only one significant rival, London-based United Business Media Plc's PR Newswire, which had an operating margin of 35 percent in 2007.
`Cheap Parts'
Tamraz had spent four years trying to sell her business. No private equity or media firm would agree to her roster of demands, including job security for her 500 employees and a free hand to run the company. Two weeks after she talked to him, Buffett agreed to all of her conditions. The price he paid was ``more than several hundred million dollars,'' Tamraz says.
Fort Worth, Texas-based TTI, which Buffett bought in 2007, is also in the distribution business. It buys components that are used in an array of electronic devices and sells them to manufacturers around the world. ``We sell cheap parts better than anyone,'' CEO Andrews declares in his Texas drawl, before correcting himself: ``We sell inexpensive parts better than anyone.''
No Losses
TTI has carved out a niche in so-called passive components -- connectors, capacitors and resistors. They sell for an average of less than 4 cents each. With 2007 revenue of $1.4 billion, TTI operates in an industry with thin margins. Everything about TTI is low cost: Its Spartan headquarters is tucked inside a 276,000- square-foot (25,600-square-meter) warehouse.
Andrews, 65, started TTI in his living room in 1971 after being laid off from a purchasing job at General Dynamics Corp. Over the years, he plowed profits back into inventory and rode out the cycles of the electronics industry that forced many rivals to sell or fold. Andrews says TTI has never posted an annual loss and has never laid off an employee.
Today, TTI's inventory is enormous. An Apple iPod may have about 500 components, and TTI says it stocks 450 of them. All told, the company sells more than a million different kinds of parts. TTI buys them from manufacturers such as Malvern, Pennsylvania-based Vishay Intertechnology Inc. and Greenville, South Carolina-based Kemet Corp. ``When you come down to it, they are an extension of our sales force,'' Kemet CEO Per-Olof Loof says.
Hamburgers and Cokes
Receiving, ``picking'' and packaging orders at TTI is largely automated. For high-volume items, automatic lifts pluck the appropriate bar-coded part -- say, a reel of capacitors -- from a revolving carousel and send it off on a conveyor to be combined with the balance of the order. Given the company's low- priced goods, any error in the process will eat up TTI's profits.
Andrews got his foot in Berkshire's door through John Roach, a friend of Andrews's who had sold Justin Industries Inc., a Fort Worth building supply maker, to Berkshire in 2000 for $600 million. Roach overnighted TTI's 3-inch (7.6-centimeter) thick book of financial information to Buffett and set up a meeting.
Andrews arrived with Roach at Buffett's offices at 10 a.m. on Nov. 15, 2006, for a scheduled two-hour meeting. It lasted twice as long, with Buffett peppering Andrews with questions about his business and family. Buffett treated his visitors to hamburgers and Cokes at a country club, and then they returned to his office.
``Warren made an offer, and Paul made a quick response,'' says Roach.
``OK, let's do it,'' Buffett said and called in CFO Marc Hamburg to work out the details. The price wasn't disclosed.
Katyusha Rockets
Andrews agreed to stay at TTI for at least three years. ``There's nothing in writing, except a handshake and a gentleman's agreement that I'm going to be here to do what I said I was going to do,'' he says.
One reason Andrews says he sold to Buffett was he had no desire to see his company loaded with debt by a private equity firm or gutted by a cost-cutting rival. Iscar's Wertheimer, 56, had the same notion. ``We are very proud of what we've built,'' he says. ``We want it to continue.''
In buying an Israeli company, Buffett took on the kind of geopolitical risk he's accustomed to as an insurer. Within days after the deal closed in July 2006, fighting broke out between Israel and the Shiite Hezbollah group that dominates southern Lebanon.
Wertheimer called Buffett to tell him that Katyusha rockets were slamming into the sun-baked hills around his plants and there was a chance his machinery would be damaged and that his employees would lose workdays.
20-Year Perspective
``I'm not interested in what happens next quarter,'' Wertheimer says Buffett told him. ``I'm interested in the next 20 years.'' Some of Wertheimer's staff did move south while the rockets were falling. Iscar didn't miss a shipment.
Wertheimer says that in the eight months and three face-to- face visits leading up to the Iscar deal, he and the Omaha investor had wide-ranging discussions about everything from philanthropy to ``how to look on life,'' in Wertheimer's words. At one point, Buffett sent him a biography of the Jewish-American educator Abraham Flexner, who helped found the Institute for Advanced Study in Princeton, New Jersey. Both Buffett and Wertheimer have a longstanding interest in education.
``I love talking to him,'' Wertheimer says. ``For me, he's a teacher.''
Wertheimer took over as CEO of Iscar in 1984, when his father, Stef, now 81, who founded the company after fleeing Nazi Germany, was injured in a car accident.
Jews, Arabs and Druse
He transformed it from a local exporter of metal-cutting tools into an international enterprise with 7,500 employees, plants from Barcelona to Bangkok and more than $1 billion in 2007 sales. In 1995, he turned over the CEO position to his colleague, Jacob Harpaz, 57.
``I was just getting in Jacob's way, so I fired myself,'' says Wertheimer, who remains chairman.
On a rainy day in March, Wertheimer leads a tour through some of the 20 buildings that comprise the company's hillside campus. The company's Israeli workers are a combination of Jews, Arabs and Druse, many of whom Wertheimer greets by name.
Iscar's tools are used by makers of cars, appliances and other durable goods to cut metal to exacting specifications. The inserts, as they're called, sell for anywhere from a few dollars to more than $100 each. Teams of Iscar designers are at work every day looking for ways to make them cut faster and more efficiently.
Sharper Tools
One customer is Bolton, Ontario-based Husky Injection Molding Systems Ltd. In April, manufacturing engineer Noel Pinto was looking for a way to improve the milling of the steel plates Husky makes at its Milton, Vermont plant. They are used in plastic bottle manufacturing, among other processes. Iscar's Thomas Raun devised a new tooling process, improving the speed of the operation by 40 percent.
``They find ways to implement new technology,'' says Pinto.
Wertheimer says he's very comfortable linking up with Buffett. ``Warren has a message to the world,'' he says. ``It's balance.'' He points with his index finger to his head, to his heart and finally to his wallet. ``And he does it in a fair, clean and nice way,'' he says.
One of the companies Buffett owns is expected to yield a new Berkshire top executive if the Omaha investor passes from the scene anytime soon. Buffett updates shareholders regularly on the subject of succession and did again at the annual meeting in May. Berkshire's board, he said, has identified three candidates with the qualifications to succeed him as CEO, and one has been selected.
`Nobody Replaces Warren'
Analysts, including Citigroup's Shanker, say based on their ages and accomplishments, the most likely candidates are NetJets' Santulli, 63; MidAmerican's Sokol, 51; Berkshire Re head Ajit Jain, 56; and Geico CEO Tony Nicely, 65.
Four money managers have also been selected as candidates to replace Buffett in his role as chief investor. The board and new CEO will decide which of those candidates he will work with.
These plans could change if Buffett remains in place for an extended period, and men like Santulli and Nicely are seen as too old to don his mantle. The new CEO could end up being the head of a Berkshire company that has yet to be acquired.
Sokol doesn't let the issue trouble him. ``There is more than adequate talent to keep the Berkshire Hathaway way of doing things going forward,'' he says. ``But nobody replaces Warren Buffett.''
Buffett treats the issue of his mortality with characteristic wisecracking humor. One Saturday morning several months ago, CTB's Mancinelli says he called Buffett, as he occasionally does. Buffett asked to call him back, saying he had an appointment with his barber.
``The way I figure it, I have just so many haircuts left in my life,'' Buffett said. ``I don't want to miss any of them.''
CREDIT AGRICOLE
June 25 (Bloomberg) -- Credit Agricole SA and Natixis SA, France's third- and fourth-biggest banks, suffered losses this month on debt securities after European Central Bank President Jean-Claude Trichet sparked a gain in short-term interest rates.
Credit Agricole's investment banking unit, Calyon, may book losses of about $300 million, said three people familiar with the situation who declined to be identified because the figures aren't public. The impact on Natixis will be ``substantially'' less than 100 million euros ($155 million), according to a spokesperson for the Paris-based bank who asked not to be named.
Trichet said on June 5 that officials may raise interest rates to fight inflation, triggering a surge in the two-year European swap rate to 5.25 percent from 4.98 percent a day earlier. The jump led to the biggest inversion in Europe's yield curve since 1992, causing losses at banks that sold notes based on the spread between short- and long-term debt.
``People have been badly burnt,'' said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets in Edinburgh. Banks ``were positioned to profit from a steeper yield curve. Then Trichet came out with his shock rate-hike announcement and the curve inverted.''
Anne Robert, a spokeswoman for Calyon, declined to comment. Pascal Henisse, a spokesman for BNP Paribas SA, France's largest bank by market value, also declined to comment, as did Russell Gerry a spokesman for Societe Generale SA, the No. 2 lender. All the firms are based in Paris.
Longer-maturity debt typically yields more than shorter- dated securities because investors demand a bigger premium to lend for a longer period.
Structured Notes
The yield curve has inverted in Europe because investors are betting the ECB will raise interest rates more than once, slowing the economy and inflation, making longer-dated debt more attractive. The yield curve on June 6 was the most inverted since October 1992, with a spread of 21 basis points.
Trichet told the European Parliament in Brussels today that he didn't mean to signal ``a series of increases.''
After the June 6 rate move, Calyon and other banks that sold so-called structured notes tied to the yield curve tried to hedge their positions by buying options on swap rates, according to one person familiar with the situation.
The cost of the options rose with a jump in volatility, a key component of the value of an option. The volatility in a one-month option on a one-year swap jumped to 29.5 percent on June 16 from 17 percent on June 4, before Trichet's comments.
`Just a Fallacy'
``More and more, we keep seeing trading books getting badly hit,'' said Peter Hahn, a research fellow at City University's Cass Business School in London and a former managing director at Citigroup Inc. ``The idea that you can safely hedge just about anything, no matter how structured, is just a fallacy. It's time banks realized that.''
The interest-rate trading losses follow record credit writedowns at banks in the last year, which hadn't anticipated the collapse of the subprime mortgage market and the ensuing credit contraction. Banks and brokers worldwide have recorded almost $400 billion of writedowns and losses since the value of bonds tied to mortgages began to sink last year.
BARCLAYS
Barclays to Raise $8.9 Billion to Lift Capital, Invest Overseas June 25 (Bloomberg) -- Barclays Plc, Britain's fourth-biggest bank, plans to raise 4.5 billion pounds ($8.9 billion) to bolster depleted capital and increase consumer lending in Asia and investment banking in the U.S.
Barclays rose as much as 8.1 percent in London trading today, the biggest gain in five years. The company said in a statement it will sell as much as 1.58 billion shares to Japan's Sumitomo Mitsui Financial Group Inc. and sovereign wealth funds in Singapore, China and Qatar.
Chief Executive Officer John Varley told reporters he will use half the proceeds to lift the bank's so-called core Tier 1 capital ratio above its 5.25 percent target and the rest for ``business opportunities,'' including possible acquisitions. Barclays sought outside funds after its capital level fell below U.K. competitors led by Royal Bank of Scotland Group Plc.
``This is both a cushion against the market environment as well as a war chest,'' said Georg Grodski, head of credit research at London-based Legal & General Group Plc.
London-based Barclays rose as much as 25.25 pence and was 7.6 percent higher at 334.5 pence at 12:35 p.m., valuing the bank at 22 billion pounds. The shares were today's best performer in the eight-member FTSE All-Share Banks Index.
The cost of protecting European bank debt fell for the first time in a week after Barclays announced its capital plans. Credit- default swaps on Barclays fell 2 basis points to 100, Credit Suisse Group prices show.
`Positive for Credit Markets'
Barclays is selling shares to Challenger, a company set up to represent Qatar's royal family; Qatar Investment Authority; Temasek Holdings Pte and China Development Bank. Sumitomo in Tokyo will buy 500 million pounds of shares at 296 pence each.
Banks and securities firms have raised almost $305 billion in the past year after record writedowns and credit losses of almost $400 billion from the collapse of the subprime mortgage market. Singapore's Temasek also has invested in New York-based Merrill, the third-biggest U.S. securities firm by market value, and London-based Standard Chartered Plc, the U.K.'s third-biggest bank by market value.
Varley said Barclays will open 300 branches this year and expand trading in its emerging markets, commodities and foreign exchange units. The bank also seeks a bigger share of the U.K. mortgage market as rivals retrench.
``We expect the longer-term growth prospects of the company to be higher than its domestic U.K. peers,'' Merrill analyst John- Paul Crutchley wrote in a note to clients today. He has an ``underperform'' rating on the stock.
All Barclays investors will get the chance to buy shares at 282 pence a share, the company. The sovereign wealth funds and other unidentified investors will purchase whatever is left. China Development is entitled to 136 million pounds of new stock, while Challenger, Qatar Investment Authority and Temasek will be able to buy as much as 2.5 billion pounds of shares at 282 pence.
`Significant Cocktail'
``We have anchor investors of high quality,'' Varley said.
By finding investors to guarantee the share sale, Barclays isn't relying on investment banks to underwrite the offering. Credit Suisse Group and JPMorgan Cazenove are working with Barclays Capital as joint brokers on the sale.
Barclays's offer of 500 million pounds to Sumitomo was priced at a 4.7 percent discount to the bank's closing share price yesterday. The offering of 4 billion pounds was priced at a 9.25 percent discount to yesterday's close of 310.75 pence a share. All existing investors will be offered three new shares at 282 pence for every 14 they own.
U.K. Slowdown
British banks face slower growth amid higher funding costs and rising defaults as house prices fall at the fastest rate since the recession of the 1990s. The credit-market freeze has halted sales of mortgage-backed securities, which lenders including HBOS Plc and Bradford & Bingley Plc use to fund property loans.
Barclays will pay a dividend of 11.5 pence a share in cash for the first half, unchanged from last year, it said. RBS and HBOS plan to pay a first-half dividend in stock to save capital.
Barclays has written down 1.7 billion pounds on credit assets so far this year. That's less than RBS, the U.K.'s second-biggest bank, which wrote down 5.9 billion pounds this year, and less than HBOS, the U.K.'s biggest mortgage lender, which marked down 2.8 billion pounds.
The bank's brokers ``rigorously'' assessed Barclays's credit writedowns, Varley said. The new shares will start trading July 22 the bank said.
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