The salient lesson was that capital was mobile. Ships might rot, but the profits need not be cast overboard with the captain’s lamp. This, however, was a point that would haunt the city’s largest mill for nearly one hundred years.
Hathaway Manufacturing Company was founded in 1888 by Horatio Hathaway, whose family had operated China clippers since the early 1800s. It was capitalized with $400,000, largely from whalers, which was symbolically evident in its location on Cove Street—smack against the sea. The New Bedford Evening Standard boasted that the ambitious new venture would “employ about 450 hands and run 30,000 spindles.” An original investor in Warren Buffett’s cotton mill was Hetty Green, the notorious miser known by the sobriquet “Witch of Wall Street.”4 *
Hathaway’s fortunes, and the industry’s, rose with those of cotton. Profits boomed during World War I, thanks to the military’s demand for uniforms and airplane cloth. In New Bedford, thirty thousand people—half of the labor force—worked in the mills.5
And then, quite suddenly, that industry also declined—or rather, it fled south to cheap labor. In the twenties, New Bedford’s workers, mostly immigrants, were forced to take repeated pay cuts. In 1928, when the mill owners demanded a further 10 percent cut, the workers struck, and remained on strike for an agonizing five months. Many mills did not reopen, and those that did were soon leveled by the Depression. By 1940, the textile workforce had shrunk to a pitiful nine thousand.6
What is notable is the way the mill owners coolly appraised their dying industry. By the late twenties, though still earning substantial profits, they were operating their plants with antique machinery. Meanwhile, dividends were kept high—on the order of 10 percent.7 The owners siphoned their capital to mills down South, to the stock market, to their yachts. Wherever the money went, the owners had learned the lesson of the whalers well. Once the industry was given up for dead, they did not reinvest in the mills. All with the exception of one: Hathaway Manufacturing.
Hathaway was run by Seabury Stanton, a proud, proper New Englander whose grandfather had captained a whaler and whose father had been Hathaway’s president. Young Seabury, born in New Bedford, graduated from Harvard in 1915, fought in France, where he was promoted to second lieutenant, and returned after the war to apprentice at Hathaway as its rightful heir. He would stay there for half a century, until his encounter with Warren Buffett.
Stanton was six-foot-two and ramrod-straight. He was formal and cool, with a stare that shot daggers. His defining moment was in 1934, at the height of the Depression. Mill after mill was folding up or moving south. But Stanton, a sailor like his forebears, looked into his soul and resolved to weather the storm. He conceived a plan to modernize, and over the next decade and a half he plowed $10 million of the company’s funds back into the mill. True to his Yankee credo, Seabury and his brother, Otis, went into hock to buy Hathaway stock on the noble belief that if the shareholders’ money was to be at risk, their own money ought to be on the line as well.8 With Seabury at the helm, the red-brick mill on Cove Street gamely withstood the economic tides.
There followed some flush years, some not so flush. Hathaway branched into synthetic fibers and pioneered in the manufacture of rayon. The demand for parachute fabric in World War II gave it a lift. After the war, Hathaway exploited rayon and became the country’s, and perhaps the world’s, biggest producer of men’s suit linings.9 † The trouble was, the product was easily imitable. It was dogged by Southern and, increasingly, Far Eastern competition. Then, in 1954, a hurricane flooded the plant, leaving it badly damaged. Stanton got lucrative offers to relocate to the South, but the old skipper would not surrender. Unwilling to leave New England, he decided to merge Hathaway with a northern manufacturer as venerable as itself: Berkshire Fine Spinning Associates, Inc.
Berkshire’s bloodlines could be traced to Samuel Slater, who had built the country’s first cotton mill in 1790. Oliver Chace, a carpenter who had worked for Slater, had gone on to establish his own mill, in Rhode Island, in 1806. Under Chace’s descendants, the business had thrived.10 A century and a half later, the Chace family still controlled Berkshire, now a sprawling collection of some dozen plants making staple fabrics for sheets, shirts, handkerchiefs, and slips.
Like Hathaway, Berkshire had been profitable in World War II and its immediate aftermath and had endured tougher times since. But Malcolm Chace, the president, had taken a wholly different tack from Stanton. Whereas Hathaway had modernized and branched into fashion, suit linings, and curtains, Berkshire, which was based in Providence, was still running cottons on ancient machinery. Chace—another white-haired, lean New Englander, who had been in the business since 1931—felt the industry had little future in New England and was running out the string. His nephew, Nicholas Brady—later Secretary of the Treasury—appraised Berkshire for his senior thesis at the Harvard Business School in 1954 and concluded on such a glum note that he promptly sold his stock.
The two companies merged in 1955, creating Berkshire Hathaway, Inc. The new company was a colossus. It had fourteen plants, twelve thousand workers, and yearly sales of $112 million. There was some thinking that Hathaway’s more modern management combined with Berkshire’s cash reserves would produce a stronger whole. Headquarters were moved to New Bedford, and Stanton was given the reins as president. Chace became the chairman.
Stanton took one look at Berkshire, which was operating thousands of looms attached to pulleys on the roof, and resolved to modernize. He put in new spindles, rebuilt looms, increased their speed, and consolidated the best of its plants.
There was a certain nobility to Seabury Stanton. In his own mind, he was an extension of Samuel Slater, one of the “imaginative men [who] found a way to link the tumbling river, the turning wheel, the crude loom, and the thread, to clothe a country.”11 He was forever guided by his experience in the Depression, which he recalled as “a time when men stood alone, upon their own resources and courage.”12 Under his stewardship, Berkshire Hathaway became the largest—and, ultimately, the only—surviving textile manufacturer of any size in New England.
But from an economic standpoint, he might as well have been harpooning whales. According to one of his lieutenants, “Seabury hadn’t the slightest concept of return on investment. He was concerned with only one thing—keeping the plant going.”13 He kept pouring money in, all the while low textile prices prevented him from recouping his investment.
Within his management, Stanton was increasingly isolated. He insisted on a regimen of argyle socks and white shirts for managers and gloves and stockings for the secretaries, and woe to the executive who dared appear in public in a sport jacket. Lord of his manor, he communicated almost exclusively via written reports, and he worked in a forbidding remove, known behind his back as the “ivory tower.” According to Malcolm Chace:
Seabury had an office in the penthouse on the second floor. No one could get in without going past the executive secretary. She also had a secretary. When you got called to his office you had to climb this long stairway. There was a door at the end, a long conference table, and at the other end was Seabury’s desk.14
At noon, he would descend from the leather-appointed ivory tower to a waiting black Cadillac, which would scoot him home for lunch past the working-class wood-frame homes in the South End. Though the mill was visible from his stairway, Stanton had little contact with the rank and file. He saw the men on the night shift once a year, at Christmas, when he somberly descended from the ivory tower to shake their hands—hands that the workers had mischievously coated with grease in anticipation of their boss’s visit.
Seabury was also at odds with Otis, his brother. Otis vehemently took issue with Seabury’s strategy of reinvesting in textiles, and was similarly unhappy with Seabury’s insistence on holding down wages at the expense of taking a strike.15 This division between the brothers began to permeate the company.
Otis split his time between New Bedford and the company’s sales office, in New York’s garment di
strict. He was outgoing and warm, and was largely responsible for the success of Hathaway’s fabled rayon suit lining. It was Otis who marketed Hathaway’s synthetic fabrics, including its linings, to “converters,” who dyed and finished them and sold them to suit manufacturers. During the war, when other suppliers had allocated scarce fabrics on the basis of payola, Otis had remained honest. After the war, when supplies became plentiful, his customers, who liked him anyway, paid him back with their business.
However, Seabury, whose expertise was in manufacturing, invaded Otis’s turf by setting up a new division to finish fabrics in-house and sell directly to manufacturers—thus cutting out the converters. This looked sensible in New Bedford but overlooked a vital fact of the trade. The weaving business was gentile. The converters were Jewish—as were the garment makers. “You had to live with them to do business with them,” noted Stanley Rubin, a Berkshire vice president for sales in New York. “That was the worst mistake that Seabury made. It was the beginning of the end.”
Increasingly, Berkshire was a house divided. When Seabury spoke about the industry’s glorious potential, the people in New York, who marketed the company’s unfinished fabrics—called “grey goods”—snickered. They could see the business sinking before their eyes. One time, a Berkshire salesman was with a customer on Fifth Avenue, trying to sell handkerchief cloth. The customer pointed out his window to the women going into Lord & Taylor and said, “You see all those women carrying pocketbooks? There is a box of Kleenex in every one. And that’s the end of the handkerchief business.”16
By the end of 1961, Berkshire was down to seven plants. In the previous three years alone, it had plowed $11 million back into the business.17 And while its mills were enhanced, its business was not. Its “regular plain weave” fabrics were commodities—indistinguishable from those of any other manufacturer. When competitors flooded the market, Berkshire was helpless. Thus, in 1962, the year that its modernization was complete, it suffered a crushing $2.2 million loss.
By then, the blood feud between Seabury and Otis was boiling over Seabury’s plan to pass the reins to his son. Jack Stanton was tall, thin, and stony-faced, like his father, but his misty blue eyes bespoke a sadness. Jack had followed Seabury to Harvard and into a world war, and had thrown a couple of no-hitters in the marines. The Philadelphia Athletics invited him to camp, but Seabury forbade it. The dutiful son gave up baseball and went to work on the looms, “shoulder to shoulder, all greased up.” By 1962, dour Jack was treasurer. Seabury, then seventy, was planning to work a few more years and make him president. Otis and Malcolm Chace each thought Jack was unqualified and secretly began to look for someone else.
On Wall Street, Berkshire’s stock was out of favor. Richard N. Tillison, a security analyst with Value Line, had recommended the shares at the beginning of 1955, at a price of 14¾. From then on, Tillison had suffered through years of oversupplied markets and shuttered mills. By early 1963, the stock was at 8⅛—down 45 percent from his original call.
But hope in the breast of a textile analyst never dies. In March 1963, Tillison reported that the outlook for Berkshire “now appears more promising than it has for a considerable time.” In June, he crawled without his shell and predicted a modest quarterly profit. Alas, in September, he was forced to postpone his hopes once more:
Berkshire is not now expected to break into the earnings column, as was earlier thought possible, because the rapid movement of many cotton textile producers into blended fabrics has caused temporary price weakness.…18
No profit “now” on account of “temporary” weakness. And so it had been for eight long years.
According to economic theory, when a company is so mismanaged, sooner or later an investor will decide that he can do more with its assets and take it over. It happened that Buffett had run across Berkshire at the same time as Tillison, when he was working for Graham-Newman, in the 1950s.19 Howard Newman had gone to look at Berkshire and had come close to making an offer for it. Buffett was merely an observer of the company’s troubles until late in 1962, when the stock fell below $8 a share. Since Berkshire had $16.50 per share of working capital, it seemed to be a bargain, and Buffett bought some stock, via his partnership. However, he had no thought of a takeover. He approached it as he did any other stock, assuming that he would hold for a couple of years or so.
But with Buffett’s interest piqued, Daniel Cowin, a New York broker friend, found several large blocks of stock for him.20 By 1963, Buffett Partnership was the company’s biggest shareholder.21 For a while, Buffett was able to keep his identity as a shareholder secret, and Cowin, playing the role of Buffett’s stalking horse, took a seat on Berkshire’s board.22
Then, word leaked out that Cowin’s client was Buffett. Stanley Rubin, the Berkshire sales executive, who knew Buffett, called to see if he was planning to buy more.
Buffett said coyly, “I may or I may not.” Still, nobody seemed to realize that Buffett might be up to something.
A short time later, Buffett visited the mill. When he found that Jack Stanton had copies of Berkshire’s financials going back to the 1920s, he got very excited and quickly made copies of them. Then he asked to see some of the plants. Jack recalled, “I was very busy, so we sent Ken Chace with him.”
This was the mistake of Jack’s life. Otis was already considering Ken Chace (no relation to Malcolm) as a candidate to succeed Seabury—though, of course, neither Seabury nor Jack, who coveted the throne for himself, had any idea of it. Chace, an unpretentious late-fortyish chemical engineer who drove a Chevrolet, was also a local boy. He had attended something called the New Bedford Textile School, joined Hathaway in 1947 to work on synthetic fibers, and worked his way up to the lofty position of vice president of manufacturing.
For two days, the square-jawed Chace took Buffett through the mills. They must have looked to Buffett like something out of Samuel Slater’s sketchbook—the thick wads of cotton-candy raw stock disappearing into giant hoppers, their fibers being combed into glossy, transparent webs, their ropelike strands being twisted into yarn on hundreds of spinning frames, aligned like soldiers. Whatever Buffett grasped of it, there was something compelling in their unsung industry, something close to the soul of New England. According to Chace:
Warren asked questions like crazy. About the marketing, the machinery, about what I thought should be done, where I thought the company was going, the technical end of it, what kind of products were we selling, who we were selling to. He wanted to know everything.
Chace spoke candidly about the company’s problems, and Buffett decided he had found his man. Buffett didn’t say much, but when the tour was over, he dropped an intriguing clue.
“I’ll be in touch with you, Ken.”
Meanwhile, Stanton finally sensed that he was under siege. In 1964, Berkshire made repeated offers to buy back shares—thereby raising the proportion of stock under Stanton’s control. Buffett was on the brink of selling out to him, but he thought that Stanton was chiseling him on the price.
“They were three-eighths of a point apart” or Buffett would have sold, according to Charlie Munger. “It was an absolute accident that Berkshire became his vehicle.”
As a corporate vehicle, Berkshire had nothing to recommend it. But now, Buffett, who felt that Stanton hadn’t been square with him,23 was unwilling to step aside. He and Stanton were bitterly at odds over an understanding that Buffett felt had come undone—though Buffett, as usual, let someone else do his fighting.
Dan Cowin and Stanton had a heated argument over it in the ivory tower. Stanton loudly proclaimed that no one would tell him what to do. Knowing that Cowin was representing Buffett, Edmund Rigby, an executive vice president, rushed in and warned Stanton, “You shouldn’t talk that way to a major shareholder.”
Events now rushed to a climax. Ken Chace, the plainspoken executive who had shown Buffett the plant, was so worried about Berkshire’s future that he had been talking to a competitor in South Carolina. Stanley Rubin ca
lled Chace early in 1965 and pleaded with him to stay put. When Chace asked why, Rubin mysteriously told him to take his word for it.
A month or so later, Rubin called again. “You remember that Warren Buffett fellow? He’s going to control Berkshire Hathaway. He’s been holding stock under Street [brokerage-house] names.” Rubin said Buffett had something to discuss with Chace and wanted Chace to meet him at the Plaza Hotel in New York.
It was one of the first fine days of spring. Buffett and Chace walked to the little park in front, and Buffett bought a couple of ice cream bars on sticks.
Wasting no time, Buffett said, “I’d like to have you become president of Berkshire Hathaway. How do you feel about that?”
Chace was forty-eight. The man who was proposing to catapult his career was thirty-four.
By the time Chace could blurt out his consent, Buffett added that he had enough stock to pull it off at the next directors’ meeting, and that Chace should keep quiet in the meantime. As regards Berkshire’s future, he said, “Figure out what you’ll need. It’ll be your baby.” Buffett was finished with him in ten minutes. Chace left in a state of shock.
What he didn’t know was that Buffett had gone to the chairman, Malcolm Chace, and offered to buy him out. Chace refused, citing his long history with the company, but some of Chace’s family agreed to sell.
Buffett had one hill left to climb. Would Otis Stanton sell his shares—and undermine his brother? Stanley Rubin set up a lunch with Buffett and Otis at the Wamsutta Club in New Bedford. After Buffett made his pitch, Otis agreed to sell—provided that Buffett make an equivalent offer to buy out Seabury. That was the break. Though Jack was primed for a proxy fight, Seabury didn’t have the stomach for it. With the Stantons’ shares, Buffett Partnership owned 49 percent of the stock, at an average cost of about $15 a share.24
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