Why did Warren Buffett purchase Iscar?
Investing behind strong management teams
In his 2006 Letter to Shareholders, Warren Buffett discusses Iscar, which was the first significant foreign acquisition by Berkshire Hathaway:
The highlight of the year, however, was our July 5th acquisition of most of ISCAR, an Israeli company, and our new association with its chairman, Eitan Wertheimer, and CEO, Jacob Harpaz. The story here began on October 25, 2005, when I received a 1¼-page letter from Eitan, of whom I then knew nothing. The letter began, “I am writing to introduce you to ISCAR,” and proceeded to describe a cutting tool business carried on in 61 countries. Then Eitan wrote, “We have for some time considered the issues of generational transfer and ownership that are typical for large family enterprises, and have given much thought to ISCAR’s future. Our conclusion is that Berkshire Hathaway would be the ideal home for ISCAR. We believe that ISCAR would continue to thrive as a part of your portfolio of businesses.”
Overall, Eitan’s letter made the quality of the company and the character of its management leap off the page. It also made me want to learn more, and in November, Eitan, Jacob and ISCAR’s CFO, Danny Goldman, came to Omaha. A few hours with them convinced me that if we were to make a deal, we would be teaming up with extraordinarily talented managers who could be trusted to run the business after a sale with all of the energy and dedication that they had exhibited previously. However, having never bought a business based outside of the U.S. (though I had bought a number of foreign stocks), I needed to get educated on some tax and jurisdictional matters. With that task completed, Berkshire purchased 80% of ISCAR for $4 billion. The remaining 20% stays in the hands of the Wertheimer family, making it our valued partner.
ISCAR’s products are small, consumable cutting tools that are used in conjunction with large and expensive machine tools. It’s a business without magic except for that imparted by the people who run it.
But Eitan, Jacob and their associates are true managerial magicians who constantly develop tools that make their customers’ machines more productive. The result: ISCAR makes money because it enables its customers to make more money. There is no better recipe for continued success.
In September, Charlie and I, along with five Berkshire associates, visited ISCAR in Israel. We and I mean every one of us – have never been more impressed with any operation. At ISCAR, as throughout Israel, brains and energy are ubiquitous. Berkshire shareholders are lucky to have joined with Eitan, Jacob, Danny and their talented associates.
The following year (2007), Mr. Buffett describes Iscar’s first full year operating under the Berkshire Hathaway umbrella:
Iscar continues its wondrous ways. Its products are small carbide cutting tools that make large and very expensive machine tools more productive. The raw material for carbide is tungsten, mined in China. For many decades, Iscar moved tungsten to Israel, where brains turned it into something far more valuable. Late in 2007, Iscar opened a large plant in Dalian, China. In effect, we’ve now moved the brains to the tungsten. Major opportunities for growth await Iscar. Its management team, led by Eitan Wertheimer, Jacob Harpaz, and Danny Goldman, is certain to make the most of them.
Iscar weathered the Global Financial Crisis pretty well, as described in the 2011 Letter:
Iscar, our 80%-owned cutting-tools operation, continues to amaze us. Its sales growth and overall performance are unique in its industry. Iscar’s managers – Eitan Wertheimer, Jacob Harpaz and Danny Goldman – are brilliant strategists and operators. When the economic world was cratering in November 2008, they stepped up to buy Tungaloy, a leading Japanese cutting-tool manufacturer. Tungaloy suffered significant damage when the tsunami hit north of Tokyo last spring. But you wouldn’t know that now: Tungaloy went on to set a sales record in 2011. I visited the Iwaki plant in November and was inspired by the dedication and enthusiasm of Tungaloy’s management, as well as its staff. They are a wonderful group and deserve your admiration and thanks.
In 2013, the Wertheimer family exercised their put option to sell the remaining 20% of the business to Berkshire Hathaway. The company continues to perform well and Mr. Buffett refers to Iscar as one of the “Powerhouse Five” (non-insurance businesses) alongside MidAmerican (now Berkshire Hathaway Energy), BNSF (railroad), Lubrizol and Marmon.
Warren Buffett and Eitan Wertheimer visiting Jerusalem in May 2013 (Source: Israel Times)
Reading through all of the commentary through the years, it is very clear why Mr. Buffett was attracted to Iscar (now referred to IMC) much of which he identified in the 2006 Letter and all of which proved out to be true in subsequent years:
It was run by “extraordinarily talented managers”.
The business had a significant economic moat — their products were not easy to replicate and “enabled its customers to make more money”.
There was a heavy consumable (i.e. recurring) element to the product — Iscar’s “small carbide cutting tools” are subject to heavy wear-and-tear and need to be replaced regularly.
The carbide cutting tools are a relatively small component in a much larger, more complicated and more expensive machine and critical to the efficient operation of the machine. Using defective cutting tools could endanger the much larger operation. As such, customers are less price-sensitive than they would be for other less critical or more expensive components.
It was resilient business, one that proved it could weather economic downturns and even actual tsunamis and come out stronger on the other end.
It could leverage the strength of Berkshire Hathaway to make bold acquisitions even during times of great uncertainty (e.g. the acquisition of Tungaloy and expansion into China).
A few other really interesting things jumped out at me:
Mr. Buffett had never heard of this business before receiving the letter and had not closely studied the specific segment (carbide cutting tools) it played in.
Nevertheless, Mr. Buffett was able to make a close-to-final decision on the business and team within “a few hours” and what took him longer to get up to speed on were more mundane “tax and jurisdictional issues” related to executing Berkshire’s first major foreign acquisition.
Mr. Buffett visited the company for the first time after spending $4 billion purchasing 80% of it. Same thing with its major acquisition of Tungaloy — Mr. Buffett visited the Japanese plant for the first time three years after approving the purchase of it.
This was originally published on Quora in December 2017.