Warren Buffett has announced his largest buyout in history, the $38 billion takeover of Portland, Oregon based Precision Castparts. This is almost twice the size of the Heinz takeover, one of his largest prior takeovers.
Heinz and other Buffett enterprises, including Burlington Northern and Pacific Power, are having a strong negative impact on the Oregon economy.
This includes potato farmers in Eastern Oregon who had a win/win long term relationship with Heinz cancelled, and local communities battling to prevent oil and coal from being shipped by rail thru their communities without adequate safety guidelines.
Burlington Northern receives more than one-third of its gross revenues from the shipment of coal and also carries more than 80 percent of the oil transported by rail in the United States. Pacific Power’s primary source of energy is coal.
Below is the link to a press release by Parish & Company in October 2005 which was provided to Berkshire Hathaway’s David Sokol and Warren Buffet for review.
In typical Buffett fashion, he is providing assurances to “top management,” what some might call insider dealing, with inevitable devastating cost cuts to follow in mid management along with significant outsourcing to related companies and aggressive use of tax havens. Not to mention erasing long-term oriented shareholder gains as investors are forced to sell the stock. One can also expect Berkshire Hathaway to use a related subsidiary to loan Precision funds at a rate significantly higher than market rates, that’s the Buffett formula.
The legal team representing Precision Castparts and its shareholders consists of Portland based Stoel Rives, the state’s largest law firm that was also intimately involved in Enron’s affairs prior to its demise, and New York based Swain Cravath, Swaine & Moore LLP.
SEC Chair Mary Jo White’s husband John White is a senior partner at Cravath, Swaine & Moore LLP. Most large law firms are now living off merger and acquisition fees and those that are doing straight up legal work have been decimated from a loss of clients due to such consolidations.
SEC Chair Mary Jo White John White, Cravath Partner
As a former CPA and auditor I can attest that independence must be achieved both in “appearance” and “in fact,” the most fundamental principle of auditing. That is a standard question on the CPA exam yet sadly it is impossible for SEC Chair White to meet.
This is not some small merger or takeover but rather the biggest deal in Berkshire Hathaway’s history and one that will greatly impact the tax base in Portland, Oregon as jobs are cut and outsourcing accelerated. Police, fire and school budgets will be greatly impacted.
The question is, how on earth are such inside deals between top management and takeover artists like Buffett being tolerated by the SEC? Put another way, who is advocating for ordinary investors in Precision Castparts? Remarkably, there has been almost no public discussion of this “deal” between top management at Precision and Buffett, expected to close in early 2016.
And where is the SEC, the “Investors Advocate,” whose job it is to protect ordinary investors interests. Granted, the workload for the SEC is staggering, and made more difficult by Buffett’s control of the media. News coverage has in fact ceased largely due to Buffett’s enormous media clout, which includes his ownership of Business Wire, numerous newspapers and other media channels, not to mention vast advertising budgets capacity to influence news decisions.
White’s job at the SEC is difficult indeed. For example, last month the Oregonian ran a lead editorial against the “fiduciary standard,” openly challenging an important SEC initiative White is advocating. Former SEC Chair Arthur Levitt, on the boards of both Bloomberg and the Carlyle Group, has called failure to establish this standard a “national disgrace.”
Buffett is clearly a political genius. Rarely discussed is that his father was an influential four term Republican Congressman from Nebraska, who also chaired Taft’s Presidential campaign in the 1950’s. No one could have started their career more politically connected.
And here in Oregon the joke is that he owns the State Legislature along with taking control of the Governor’s office with the ascension of Kate Brown after popular four term Governor, John Kitzhaber, was run out of office over a scandal regarding his partner’s advocacy of “clean energy.”
Hayes was not a state employee yet emails indicated she was actively acting as if she were. Of course this is nothing new for spouses of public officials. What really put Kitzhaber’s demise on overdrive was charges against Hayes of tax fraud, specifically, not reporting her consulting income on behalf of clean energy non-profits.
These charges were completely made up and a gross breach of journalistic ethics given that Hayes released her 1040 showing net consulting income yet never provided a schedule C, which would show gross consulting income along with all her various expenses. Reporters essentially took the net income amount on the 1040, compared it to publicly disclosed gross revenues from consulting contracts, and claimed tax evasion in several major front page stories and editorials.
How do I know this? I was asked the by key journalist involved, as often is the case, to review the tax returns for major public officials. In this case I was provided the returns by Nigel Jaquiss of the Willamette Week, completed the review, and clearly indicated there was nothing there. Nigel followed up with a thoughtful analysis, highlighting net business income. Sadly, other reporters at major publications then took this “net” number and compared it to the publicly revealed gross consulting revenues and ran major front page stories and editorials, almost on a daily basis, essentially charging Hayes with criminal tax evasion.
What never came out is the Kitzhaber and Hayes filed separate returns in which he used a local CPA firm and Hayes returns were “self prepared.” Rather than give Hayes the benefit of the doubt and let the IRS do their job, as should be the case with any citizen, public or private, she was crucified in the media and remarkably no one came to Kitzhaber’s defense.
And once the new Governor Kate Brown stepped in, her first major action was to try and bargain away the “clean energy” bill for a transportation funding package. And who would be the single biggest beneficiary, that’s right, King Coal Warren Buffett.
Bravo Warren! You are amazing?
Investment advisors like myself who walk the walk with respect to long term oriented investment rely on the SEC to function as the “investor’s advocate.” That is all investors, not just takeover artists like Buffett who have never created anything but rather specialize in inside deals with top management, appeasing shareholders with a short term spike in the stock price and then gutting companies, as was done with Heinz, Burlington Northern and Pacific Power.
One could argue that this takeover should be denied on national security grounds given Precision Castparts key role in the aerospace industry and Buffett’s inability to manage companies in which true innovation is required. Similarly, if the national power grid is a strategic issue, how can we rely on Buffett to make the key decisions required for security when all he seems to know how to do is gut companies and then thrive on corporate welfare. And while he boasts about the cash flow Burlington Northern is generated, businesses suffer from gross neglect and related bottlenecks in the rail system.
In 2015 Buffett boasted in a front page Barron’s story that he and his Brazilian private equity partners made $22 billion in the first two years after his $25 billion takeover of Heinz. Long term Heinz shareholders were stuck with a tax bill and dedicated employees and vendors were betrayed. Buffett creates one debacle after another yet the media never seems to provide coverage.
Meanwhile here in Oregon the $80 billion state pension fund managers have said nothing about the takeover of Precision Castparts. They perceive their role as narrow and only related to returns on portfolio investments. One could argue however that the PERS system needs a strong tax base, in addition to returns on the existing portfolio. A tax base being decimated by such takeovers.
Oregon PERS was the original large outside investor in KKR and has large investments in both hedge and private equity funds, including KKR, TPG and Blackstone. These firms make tax evasion a science by gaming residency via tax havens ranging from the Caymen Islands to the UK.
It is ironic that the chair of the Oregon Investment Council, Katy Durant, has not clarified if she is a full resident of the State of Oregon for tax purposes, not only for W-2 wages but also investment income. Perhaps that is where tax reform should begin, that is, full disclosure regarding tax residency for public officials and for publicly traded companies a footnote that summarizes actual taxes paid, the specific type of tax whether state, federal, property, etc. and the years to which the taxes paid apply. This would be great information for investors, advisors like myself and other stakeholders. In addition, it would meet the spirit of the SEC rules.
A likely impact would be fewer takeovers of companies vital to the economy, like Precision Castparts, leading to stronger local schools and services and better long term returns for investors as tax receipts stabilize. Put another way, go home Warren. Enough of the “big con.”
Sondland is a major real estate developer with numerous points of intersection with real estate investments made by the Oregon Investment Council. He was also the most ardent opponent of a convention center hotel in Portland, fearful it would compete with his existing properties, yet when the city finally crossed a legal threshold making it a reality, Sondland proposed that his firm handle the contract.
Even though private equity and hedge funds have produced poor returns for years, the Oregon Investment Council under has dramatically increased investment in this area under Durant with TPG, KKR and Blackstone being three of the primary beneficiaries.