Warren Buffett’s acquisition process is pretty simple: he looks at you.
Speaking with Carol Loomis at the Fortune Most Powerful Women summit on Tuesday, Buffett explained the process that led to Berkshire Hathaway’s big deal of the summer, its $US37 billion acquisition of Precision Castparts, a manufacturer of parts for aeroplanes.
Buffett explained to Loomis that he met with Precision Castparts CEO Mark Donegan for about 10 or 15 minutes and asked if he’d listen to a takeover offer from Berkshire. After taking this to his board, Donegan agreed to listen to an offer.
And so Buffett made an offer, they talked about it, and then had a deal. At this point, Buffett said he and Donegan had spoken for about 25 minutes in total.
How does a deal like this come together so quickly?
“We basically do no due diligence,” Buffett explained. “Our due diligence is basically looking into their eyes.”
Buffett said that ahead of making an offer for Precision, Berkshire had no financial figures beyond those that were publicly available. Buffett’s main concern was whether or not Donegan thought he’d retire at 65. (Donegan is 58.)
Because unlike many companies that require CEOs to retire at a certain age, Berkshire has no retirement age and in Buffett’s words “needs” its managers to stay on for as long as possible.
Loomis — who retired from Fortune last year — asked Buffett, then, how he goes about replacing CEOs if and when they need replacing. Sometimes they’re just not the right person for the job, and sometimes a CEO has grown too old to do their job as well as they had in the past, Buffett explained.
Buffett said replacing CEOs is his job alone and he’d give anything not to have to do it. But telling a CEO they need to go isn’t usually as bad as Buffett fears, even when it’s telling a manager they need to move on because they’re not doing an adequate job due to their age.
Buy because of the company, not the leader
Buffett added that one time a Berkshire company was run by an executive that he and his partner Charlie Munger really liked but saw infrequently. And so it turned out this executive had developed Alzheimer’s but had been able to hide it for a few years before they figured it out and replaced the guy.
“But I really thought it was a pretty good test,” Buffett said. “You should buy companies that are good enough so somebody with Alzheimer’s can run it.”
“When you hit the junk heap at Berkshire, you’re really ready for the junk heap,” Buffett said.
And when he looks at folks that have retired, Buffett doesn’t see much that’s appealing. “They spend their whole week planning a haircut.”
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