How Buffett blew his Kraft investment
June 10, 2010
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Buffett's purchase of BNI was a mistake on many counts: he bought a useless railroad company with no future, he mistimed it, he overpaid for it. But it was also a mistake in terms of opportunity cost. Buffett had already owned his best investment opportunity, and missed his chance to complete the purchase for roughly the same amount of money that he instead misspent on BNI.
The company name was Kraft Foods, the market cap was comparable to BNI, and the business was minting money like no railroad company ever will. Buffett already owned about 9%, and could buy the rest very cheaply because the stock (not the business) was blessed with an incompetent and power-hungry CEO determined to run the business into the ground if necessary in order to purchase a new shiny trinket (Cadbury). The CEO's expensive ambition depressed the stock price and it became very cheap. It was not cheap for retail investor Joe Sixpence because Joe would have no hope to get rid of the CEO. But it was cheap for Buffett who was already a major holder and only needed to boost his stake to 50% + 1 share to replace all the management and call off the value-destroying deal.
To that end, Buffett would only need to purchase a little more than 40% of the company, and that assuming that he acted alone. In practice, he could easily buy a smaller stake if he aligned himself with some of the other major holders such as Capital Research or Morgan Stanley and convinced them that ousting the incompetent management was in everybody's interest. Realistically speaking, a 20% share of KFT and an alliance with other holders - who would all be eager to vote with Buffett if that's what it took to win a word of approval from the Snawball - would be sufficient.
By letting his childhood obsession with trains move his focus away from the real prize, Buffett missed his chance to rescue his considerable investment in KFT, turn around an excellent business, and profit handsomely from that turnaround. He also missed his chance to boost his reputation by helping fire a corporate executive who was doing damage to her shareholders. And last but not least, Buffett could thus avoid overstretching his finances because quite frankly, purchasing BNI was a little more than he could chew.
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