EDITORIAL: Warren Buffett on big deal failures
Why so many of SA’s headline-grabbing foreign deals have ended up as a bust
In recent weeks, some of SA’s brightest minds have been doing their best to put their finger on why so many of SA’s headline-grabbing foreign deals have ended up as a bust. It’s a long list that includes the likes of Brait, Famous Brands, Truworths, Mediclinic and Netcare. A number of theories have been offered — including, most obviously, corporate vanity.
Last week, Berkshire Hathaway founder Warren Buffett took a stab at this question in his annual report — something of a must-read for aspiring investors and executives.
"Why the purchasing frenzy?" he asks. "In part, it’s because the CEO job self-selects for ‘can-do’ types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to have a normal sex life."
Once a CEO has a hankering for a deal, he’ll be cheered on by "investment bankers smelling big fees" and staff envisioning enlarged domains and higher salaries. In this environment, Buffett concludes: "The CEO will never lack for forecasts that justify the purchase."
Which, again, attests to the need for wiser, more sceptical boards able to keep a leash on a CEO who believes the shareholders’ money he is entrusted with is his own. Those boards, in SA as all over the world, are few and far between.