Berkshire Hathaway's Billionaire Warren Buffett Says Skip Paying Wall Street for Advice on Activists

Story by Bloomberg
Written by Noah Buhayar and Sonali Basak

Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway Inc., said corporate executives who are seeking to fend off activist investors should return to the basics and consider skipping strategies pitched by Wall Street.

“The best way to keep activists away is to perform reasonably well in your business and also to communicate well with your shareholders,” Buffett said Tuesday at Fortune’s Most Powerful Women Summit in Washington. “You’ve got a bunch of owners out there and, on balance, they’re going to be on your side. After all, they’ve got their money with you.”

The rising influence of money managers who amass stakes in companies and push for changes has spurred an industry of bankers and lawyers peddling expensive advice to companies, Buffett said. Goldman Sachs Group Inc. and Morgan Stanley, the No. 1 and 2 takeover advisers this year, are among firms that have been hiring in their activism-defense groups.

“It’s in Wall Street’s interest to scare managements about activists,” Buffett said. “They’re not dying to have an activist knock on your door, but it doesn’t cause them to break out in tears either, because you take them on and they get all involved in your strategy. And it’s their job, to some extent, to make you worry even more than you probably should.”

‘Like Sharks’

Buffett, 85, has long been a critic of Wall Street excesses, panning bankers and their outsize pay in his annual letters to shareholders. He and Berkshire Vice Chairman Charles Munger have become increasingly outspoken in recent years about the popularity of activist investing, too, saying the money managers who pursue the strategy are often looking for short-term gains.

The trend has gotten so much momentum that now even decently run companies are being targeted, Buffett said Tuesday, without citing examples.

“They’re like sharks: they’ve got to keep swimming,” Buffett said of activists, adding that some are paid fees tied to how much money they manage. “They stretch for targets, and you’re seeing that. But there is a place for them in America. All American businesses are not being run in the interest of their shareholders with really capable management. When that happens, change is needed.”

Two of the biggest practitioners of activism -- Bill Ackman and Carl Icahn -- have disputed Buffett and Munger’s characterization of the approach, saying that they’re invested for the long-haul. They’ve argued that their efforts have led to improvements at companies including General Growth Properties Inc. and Apple Inc.

‘Fun to Joust’

Just last week, Icahn got his way at Freeport-McMoRan Inc., the world’s largest copper producer, which announced it was naming two of his associates to its board. The billionaire has also staged campaigns at companies including Hertz Global Holdings Inc., Gannett Co., Family Dollar Stores Inc. and EBay Inc. since the beginning of 2014.

DuPont Co. has been battling a separate campaign. CEO Ellen Kullman abruptly resigned this month after narrowly winning a proxy fight in May against Nelson Peltz. The investor has pushed to break up the company.

Buffett joked that if executives get desperate in such situations, they should send the agitators to Berkshire, which is well positioned to resist pressure from activists. The billionaire is the largest shareholder there and his friends also hold major stakes.

“It’s just fun to joust with them,” he said. “They’re not going to get anyplace, so maybe we can be sort of a rest home for activists.”

‘Life of Misery’

Buffett built Berkshire into a sprawling conglomerate over the past five decades, largely by buying businesses and leaving management in place. The Omaha, Nebraska-based company now has more than 80 subsidiaries, ranging from auto insurer Geico to railroad BNSF.

He said he has no intention of joining the activists’ ranks.

Munger “told me 20 years ago, if you want to guarantee yourself a life of misery, marry someone with the idea of changing them,” Buffett said, adding that his preferred approach in investing is to back companies where he can “join in the spirit of the whole organization.”

For people who go into relationships seeking change, “You’ll be miserable the rest of your life,” Buffett said. “I’m just not looking for that kind of trouble.”