Finance History | See's Candies, South San Francisco, 1972 — The US$25 Million Purchase That Changed What Berkshire Would Buy

See's required only US$8 million of net tangible assets in 1972 dollars to earn about US$4 million before tax in 1972 dollars.

Blue Chip Stamps, then controlled by Warren Buffett and Charlie Munger and later merged into Berkshire Hathaway, paid US$25 million in 1972 dollars for the candy company. The price was more than three times those tangible assets, a multiple that challenged Buffett's habit of buying businesses mainly because their physical assets looked cheap.

The missing asset was customer attachment. See's could raise prices without requiring a comparable expansion of factories, receivables or inventory, because customers associated the brand with a specific gift and a consistent product.

Its cash cycle helped. Customers paid at the counter, eliminating accounts receivable, while a short production-and-distribution cycle limited inventory; the company could therefore generate earnings without tying up much additional capital.

That is why See's became a model for Berkshire's later acquisitions. A business earning high returns on modest tangible capital can send cash to its owner, which can invest the proceeds elsewhere instead of forcing them back into the same operation.

The lesson differed sharply from textiles. Mills demanded continued spending simply to compete, while a durable consumer franchise could preserve its position through product quality, service and pricing power.

The South San Francisco plant at 210 El Camino Real had been constructed in the mid-1950s and became the company's headquarters after the acquisition. The building anchors the place where a familiar retail brand turned into a practical education in intangible value.

By 2007, Berkshire reported that See's had required only a nominal US$32 million of additional capital from 1972 through 2007 while producing a nominal US$1.35 billion of cumulative pretax earnings over the same period. The accounting figures made visible what the 1972 purchase had revealed: earning power can reside in habits and reputation rather than machinery.

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