Patience, experience and a global reputation mean the Berkshire Hathaway chief is in a very strong position from the start
What makes Warren Buffett such a successful negotiator?
Nicknamed “the Oracle of Ohama”, Warren Buffett is among the most successful investors of recent history.
A member of the world’s richest individuals club, his wealth is estimated at US$78.7 billion, according to Forbes magazine. He led his holding company Berkshire Hathaway from a textile firm with $120 million in revenue to the fourth-largest public company in the world, with a revenue of $223bn in 2016. His way of doing business and negotiating deals offers great insights that can inspire most managers.
In 1962, Mr Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. In 1964, he received a vrbaltender offer of $11 1⁄2 per share for the company to buy back his shares. Mr Buffett agreed to the deal. A few weeks later, he received the tender offer in writing, but the tender offer was for only $11 3⁄8. Mr Buffett later admitted that this lower offer made him angry.Instead of selling at the slightly lower price, he decided to buy more of the stock to take control of the company.
Since then Mr Buffett has regularly expressed doubts on the evolution of finance. Far from the high-frequency trading innovation or the hedge-fund model, he emphasises the importance of patience and long-term view. He considers that trading in and out hurts the possible returns one can make over time. He suggests that practice doesn’t help investors ride out market fluctuations.
The successful businessman has been Coca-Cola’s largest single shareholder since the 1980s. Recently, the beverage company launched in China a special edition of its Cherry Coca-Cola, on which the face of the billionaire appears. In fact, the drink is said to be his favourite, and his name has become synonymous with success in the country.
When asked during the Berkshire Hathaway 2017 annual shareholders meeting about the key factor he looks for before investing , he replied: “It would tend to be a business that for one reason or another we can look out five or 10 or 20 years, and decide that the competitive advantage that it had at the present would last over that period.” These companies have long-term strategies, generate sustainable profits, re-invest in their growth, and offer investors more dividends.
Beyond his legendary patience with investments he holds, Mr Buffett is also extremely cautious when it comes to committing to new ventures. It is probably his best tactic when negotiating; he is only committing to few companies every year and has a reputation of being very demanding. Companies looking for funds know he can walk away at any time if the proposal isn’t interesting enough. They also get to learn he doesn’t bargain. So there really is only limited opportunities to interest him.
On the opposite side of the fence, the US president Donald Trump mentions in his book The Art of The Deal: "I never get too attached to one deal or one approach. For starters, I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first."
Mr Buffett indicates in the Berkshire Hathaway shareholders’ letter that he would never make the first bid. His aim is to receive offers that he can evaluate. He then judges if they are of benefit to both the existing shareholders and his firm, or aren’t serious enough for him. He wants to appear as much as possible as the one you go meet when you have a good deal to offer. It isn’t a position most investors can take, unless they have gained that global recognition.
As his business and its cash hoard grew, Mr Buffett’s company became a haven for other firms facing financial challenges, or those looking for stable stakeholders. The Oracle of Omaha gained a stronger leverage in periods of economic slowdown, as his investment decisions could mean more on the financial markets than a triple-A rating from rating agencies such as Moody’s or Fitch. He uses his reputation to his benefit when negotiating. That translates into a premium to the cash Berkshire Hathaway can bring in a transaction.
Investors, at least in general, tend to take rational decisions and focus their efforts on lowering risks. A very successful negotiator himself, Mr Trump in his own words “plays to people's fantasies”, and admits “people want to believe that something is the biggest and the greatest and the most spectacular. It's an innocent form of exaggeration, and a very effective form of promotion.”
Mr Buffett, on the other hand, gives his partners the comfort of a long-term and cautious approach, and that has translated for him into wealth and success. This positioning appeals to the larger number of risk-adverse investors and shareholders.
Most managers tend to rush discussions when negotiating deals. Before discussing all subjects, they challenge their counterparts to "give more". They then often lose the bigger picture. At his company, Mr Buffett goes through full due diligence, and evaluates the company, its market, and competition, but also its management and future plans. It is only after he has worked through these details that he starts to negotiate. By negotiating with a comprehensive view of the situation in mind, he is both able to get a more accurate impression of a company, but also to use information to his benefit.
Mr Buffett's approach to business is certainly key in his success. His patience, long-term view, rational approach and his negotiating style all contributed to bringing Berkshire Hathaway enormous opportunities and dividends.
While both Mr Buffett and Mr Trump have built fortunes, and certainly have incredible self-confidence, their business style couldn’t be more different.
Both have gained the admiration of investors for their business acumen. It is up to those investors to choose which style they prefer.
Radoine Nachdi manages the Abu Dhabi activities of Chalhoub Group and is a guest lecturer on business negotiation at Paris-Sorbonne University Abu Dhabi