B000U5KFIC EBOK (27 page)

Warren immediately flew out to visit Harry See.

That was in November 1971, recalled Chuck Huggins. Harry See was
fond of Hawaii, and "We were preparing to open our first shop there. I
was commuting back and forth between Honolulu and the mainland. I got
a call from Harry saying `we've got some very serious potential buyers. I
want you to come back and help me talk to them.' We were to meet them
Saturday after Thanksgiving."

Huggins hurriedly caught a flight home for the meeting, which was
held in a Los Angeles hotel. Harry See, See's chief executive officer Ed
Peck, and a See's attorney were already there. Huggins saw Munger for
the first time when he walked into the room with Buffett, Guerin, and
Flaherty.

"So we sat and talked a couple of hours. Harry explained who they
were, which didn't mean anything. Berkshire Hathaway-everyone
thought that was a shirt company. Nobody knew who Charlie was
and Rick was maybe involved in property development. He had some relationship with Blue Chip. Anyway, Warren made a lot of comments.
Charlie would periodically interrupt and put in his comments. Rick didn't
say anything. We got to a point where it was evident that they were serious about buying See's. There were two things to be resolved-how much
to pay and how the business would be run. Warren said, `Harry, we need
to talk to you about the price privately.' Warren then said to Harry, `If we
go through with this, we don't run companies. I need to know who will
run the company.'"

Peck was ready to retire, so the question presented a problem.
"Harry looked around the room and saw me, and said, `Chuck will.' That's
how it happened. Warren said, `That's fine.' Charlie and Rick and I would
like to meet with Chuck tomorrow."

Huggins had some experience with such meetings already, thanks to
the buyers who backed out at the last minute. He knew that Harry See had
already told the potential owners all the good things about See's.

"I prepared myself by figuring what the company had been doing up
to that point. I intended to tell them all the things I thought were problems, things we were working on, my view of the competition. The bad
stuff. I gave them a list of my problems and solutions."

"Warren was very calm, down to earth," recalled Huggins. "Rick
never did say much. Charlie would volunteer whether asked or not. There
were Warren and Charlie talking at the same time-it gave me insight. But I liked all three of them. There was no blowing of horns about what
they'd done. I knew Charlie was a lawyer. That came out. Warren is like
an old shoe. Charlie's a college professor or a chief justice of the Supreme
Court, and my feeling about Rick was he was hip about everything. He is
completely unrelated to those two, except that he was related. He never
seemed serious, but he was."

Warren explained to Huggins that first the purchase had to be settled, but, "if that happens, here are a couple of things that are expected.
First, we want you to run See's as president and CEO, and second, we
don't want any Sees left with a relationship to the company. Some of the
people have been around for a long time. Make a settlement and they can
go their way."

Huggins said Warren and Charlie wanted him to have full control.
"We want you to maintain company ethics and standards," said Buffett.

The See family was asking $30 million. But because of See's low book
value, Buffett and Munger decided not to go above $25 million. The talks
ended, but later See called back and accepted the $25 million.' Munger
and Buffett purchased See's Candy on January 3, 1972, paying three times
book value, something they'd never done before.

"I was thinking, Charlie lives in Hancock Park. Warren's going back
to Omaha," said Huggins. He was worried about how he would communicate with his new employers.

Buffett told Huggins that he realized that the sale was coming at See's
busiest time, since it makes more than half of its profits at Christmas. The
group would get together after the holidays, said Buffett, and talk about
how to proceed next.

"We shook hands. That was the last meeting I had until after Christmas," said Huggins. "I still didn't have a sense about Warren. I couldn't
find out." Since that time, Huggins has learned a lot about both Charlie
and Warren.

"The actual contract signing was January 31, 1972," said Huggins,
and within a month Charlie and Warren were back in his office. "I would
be sitting at my desk, the two of them in front of me. Warren would ask
questions, Charlie would inject a lot of opinions."

Nevertheless, Huggins was feeling positive about See's new owners.
"I got the strong feeling that we were the luckiest people in the world.
Warren reminded me of someone I admired-Will Rogers. Homey, trustworthy, absolutely brilliant. It was as if he'd run a business just like ours.
Charlie was similar-I was a little guarded with Charlie. He was very absolute. Warren left some room for your opinion. With Charlie, it was `hep,
two, three, four,' but I got used to that. It was just his style."

But, Huggins learned not to take Munger lightly. "If you've ever tried
to get Charlie off a position, you're wasting your time. He sort of huffs
and tosses his head, and you can forget anything from there on."

"While Blue Chip owned us, it was clear Warren, Charlie, and Rick
were the owners," said Huggins. "I asked, `you'll all disappear-exactly
how do you want me to communicate with you?' Warren said `Do what
you've been doing. Let us know if there are danger signs, trouble, but you
just keep us informed. Figure out some way to do that.' He said, `If
you can build on what the See family has done, make it more grand, that
would be good.'"

Then Buffett added an observations about the candy itself, "You're
priced well below the market."

Despite Huggins' positive feeling about the deal, there were problems. His immediate challenge was to convince loyal customers that See's
would not change under the new owners.

First, in 1972 when the purchase was publicized in the newspaper,
it became known that Blue Chip had bought it. "Well," said Huggins.
"People didn't have a lot of respect for the company. They'd just been
through an antitrust case-they looked bad. That left a bad taste in the
mouths of our most faithful customers. In 1972 and 1973, I spent a lot of
my time dealing with customers who were concerned, mad that the family had sold and now it was in the hands of a company that would ruin
See's. Suddenly we got a lot of hate mail, people claiming the candy had
changed."

See's long-term customers were used to a genteel experience when
visiting the shops and were in a near panic. They filled their local stores
to express their concerns, which in turn, upset the employees.

Huggins wrote in the company newsletter. "This must seem like a
time of the most profound changes in the 51-year-history of our company.
Yet there is even more that has not changed. We will not change our personal relationships with employees or customers. We want to go forward
without losing any of the vital ingredients that have gone into the making
of See's Candy." It took Huggins nearly two years to smooth over the uproar caused by the sale of See's.

Once the dust settled, See's started expanding into markets in Missouri, Texas, and Colorado and even as far away as Hong Kong. See's participated in the 1982 World's Fair in Knoxville, Tennessee, and the
exhibit was such a success that See's opened a shop in Knoxville.

A recession hit in the 1980s, however, and many of the out-of-state
shops were closed. Customers in distant locations were forced to order by
catalog and telephone.

During this same period, the Retail Clerk's Union attempted to organize the salesforce in the stores. See's since has triumphed in four attempts to organize by the Retail Clerk's Union, mainly by paying higher
than union-scale wages. See's later had problems with union truck drivers
who delivered the product, but through a labor negotiator were able to
cancel their contract and transfer the work to a private trucking company,
which then rehired most of See's senior drivers.

At one time, See's came under attack by a major candy producer from
the Midwest.

"In 1973, Russell Stover Candies [which traditionally was sold
through other retailers] went heavily into their own stores. They decided
to put on a campaign with See's and beat us out in our own marketplace,"
recalled Huggins. "They put in stores that looked exactly like See's, called
Mrs. Stover's. They duplicated our identity and tried to grab our market.
Of course, I informed Charlie and Warren about the fact."

Munger said, "If they are infringing on our trademarks in any way, we
can go after them."

"Then, Charlie gave me a lot of direction of what to look for," said
Huggins.

Huggins hired a photographer and told him to take pictures of things
in the Stover stores that resembled See's trade dress, such as checkerboard floors, lattice in the windows, and old-fashioned photos on the
walls.

"Charlie said `I want this to be handled by a partner at Munger,
Tolles. She was born in California, teaches at University of California at
Los Angeles Law School. I will assign her to this action. I want you to
come to the office and meet her.' It was Carla Anderson Hills. I met her
and liked her. It took me about 30 minutes to realize that she was the
same personality type as Charlie."

What kind of personality was that? "Go get 'em," said Huggins, snapping his fingers in the air. "It was fun. The upshot was, Charlie scared
them to death with all these planned legal responses if they persisted.
They backed off. They agreed they wouldn't put in any more copycat
stores, and after a time would change the ones they had."

Part of See's competitive advantage is that it is a leader in its market.
"In some businesses, the very nature of things is a sort of cascade toward
the overwhelming dominance of one firm," said Munger. "It tends to cascade to a winner-take-all result. And these advantages of scale are so
great, for example, that when Jack Welch came into General Electric, he
just said, `To hell with it. We're either going to be number one or number
two in every field we're in or we're going to be out.' That was a very tough-minded thing to do, but I think it was a correct decision if you're
thinking about maximizing shareholder wealth."'

During that period, Huggins came to the opinion that Munger was a
very practical person. "The Ben Franklin thing is appropriate. Charlie's as
corny as hell, but what more do you need?"

The problem with encroachment on its territory took several years to
resolve, said Huggins, and there were other difficulties as well. During
President Richard Nixon's wage and price controls, for example, the company had to operate differently.

Once the problems of the early days were under control and See's
was running smoothly, Munger and Huggins spent less time together.
"The personal and direct contact has diminished over the last 10 years."
said Huggins. "I miss that. I now talk to Warren on a regular basis. We talk
on the phone every 10 days or so. He and Charlie then talk. I don't need to
call both."

IN THE 1990s, SEE'S STARTED a more cautious expansion, and rather than
build more stores, they established counters at airports and in department and other stores.

At the end of the century, See's operates approximately 250 blackand-white shops across the United States, with two-thirds of them in California. The company sells 33 million pounds of candy a year. More than
75,000 pounds of candy was sold through See's Internet site, a competitor
to its own toll-free order service. The company's 1999 sales were $306
million, and its pretax operating profit was $73 million.

Though it doesn't compare to the year-end holiday season, the Berkshire Hathaway annual meeting each May in Omaha is an important day
for See's. "We did $40,000 [in sales] at the 1999 annual meeting," observed Huggins. "Warren's proud of that."

"SEE'S CANDY," REMINISCES MUNGER. "It was acquired at a premium over
book [value] and it worked. Hochschild, Kohn, the department store
chain, was bought at a discount from book and liquidating value. It didn't
work. Those two things together helped shift our thinking to the idea of
paying higher prices for better businesses."'

When they bought See's, Charlie and Warren still were bottom fishers. But as they learned and as the business grew, change was necessary.
"You could once find value by just rooting around in the less traveled parts of the world-the pink sheets-you'd find a lot of opportunity,"
said Charlie.'

It was only luck that Blue Chip was able to buy See's at the price they
paid. Munger credits Al Marshall for giving the final push toward the correct decision.

,,If they had wanted just $100,000 more for See's, we wouldn't have
bought it," said Munger. "We were that dumb hack then.""'

Even so, "When we bought the business, almost nobody was having
much success selling boxed chocolates except See's, and we wanted to
know why that was, and if the success was sustainable," said Buffett.

When See's turned out to be an excellent, ongoing business, Munger
and Buffett realized how much easier and pleasanter it was to buy a good
business and just let it roll along, than to buy a deeply discounted but
struggling business and spend time, energy, and sometimes more money
setting it straight.

"If we hadn't bought See's, we wouldn't have bought Coke," said
Buffett. "So thank See's for the $12 billion. We had the luck to buy the
whole business and that taught us a whole lot. We've had windmills, well,
I've had windmills. Charlie was never in the windmill business. I've had
second rate department stores, pumps, and textile mills ..." which he decided were nearly as problematic as the windmills.

Munger says he and Buffett should have seen the advantages of paying for quality much earlier. "1 don't think it's necessary to be as dumb as
we were."u