The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

by Tobias E. Carlisle

In the past, Buffett would have sought a lower price, perhaps a discount to the hard assets, to give a margin of safety. But See’s ability to make lots of profit on little hard assets made it worth a lot more than its hard assets. See’s high profits allowed it to grow quickly and throw off cash at the same time. But what was See’s worth? See’s made just less than $5 million pretax in 1971. It earned a huge 60 percent profit on its $8 million in hard assets ($5 million ÷ $8 million = 60 percent). Let’s assume a discount rate of between 10 and 12 percent. (In 1972, we could get 6 percent leaving our cash in the bank. We add on a little extra—4 or 6 percent—because See’s is riskier than a bank account.) In that case, See’s was worth between five and six times its hard assets (60 percent ÷ 10 or 12 percent = 5 or 6 times). With $8 million in hard assets, See’s was worth between $40 and $48 million (5 or 6 × $8 million). The $25 million price was only about one-half to two-thirds See’s value. In this light, See’s was a bargain. There is a secret to See’s. Even if Buffett had paid full price, See’s would still have been an incredible investment. Here’s why. In 2007, twenty-five years after Buffett bought it, See’s earned $82 million on $40 million in hard assets. That was an amazing 195 percent return on assets. The huge growth in profit—from $5 million to $82 million—happened without much more invested in its hard assets. See’s paid out to Buffett almost all the profit it made ...