2018: Will Berkshire's future leaders get the same deal flow Buffett and Munger see?

BECKY QUICK: This question comes from Kirk Thompson.

He says, “Warren, in this year’s annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it’s hard to get more acquisition deals done.

“It seems like the trust in — and prestige of doing a deal with Warren Buffett and Charlie Munger allow Berkshire to get a hometown discount and beat out other firms that might pay a little more to a prospective seller.

“Have you given thought to having other Berkshire managers have more public exposure, so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades?”

WARREN BUFFETT: Yeah, that sort of reminds me of — who was it? Tony O’Reilly remarked one time about the responsibility of a CEO.

That the very first job of the CEO was to search through his organization and find that person who had the initiative and the brains, the determination, all of the qualities to be his logical successor, and then fire the guy. (Laughter)

The — there’s no question. I think the reputation of Berkshire as being a very good home for companies — particularly private companies — but a good home for companies, I don’t think that reputation is dependent on me or Charlie.

It may take a little, you know, there’ll be a little testing period for whoever takes over, in that respect. But, you know, basically we’ve got the money to do the deals. We’ll have the money to do the deals subsequently. People can see how our subsidiaries operate in the future.

And the truth is that, I think some of the other executives are going — are getting better known. But there will be a — you know, I’ll tell you this, if things get bad enough, you don’t have to worry. They’ll be calling us no matter what. (Laughs)

So I do not worry about the so-called “deal flow,” which is a term I hate. But I don’t think there’s — I think that’s dependent on Berkshire and not dependent on me.

And, you know, as I’ve mentioned, my phone isn’t ringing off the hook with good deals. So apparently this big winning personality or something is not delivering for you. (Laughter)

So it may be the next person will be even more — get even more calls.

Berkshire — the reputation belongs to Berkshire now. And we are, for somebody that cares about a business that they and their parents and maybe their grandparents lovingly built over decades — if they care about where that business ends up being after, for one reason or another, they don’t want to keep it or can’t keep it in the family, we absolutely are the first call.

And we will continue to be the first call, whether Charlie or I answer the phone or somebody else does.

Charlie?

CHARLIE MUNGER: Well, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know and we don’t. So it’s already happening. And, in fact, it’s happening more there than it is at headquarters, so —

WARREN BUFFETT: Don’t tell them, Charlie.

CHARLIE MUNGER: You’re getting your wish. (Laughter)

And it is weird that about 99 percent of the public companies that change hands, in terms of control, change hands in a sort of auction presided over by an investment banker.

And the people that buy are usually just leverage it to the gills, and when it starts doing a little better, they re-leverage it.

And that money is coming out of the charitable endowments and pension plans who are making these highly-leveraged investments in all these companies changing hands at very high prices. Sooner or later, this is not going to work perfectly.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And it’s going to have an unpleasant episode. And I think we’ll be around and in good shape at that time.

WARREN BUFFETT: There was one fellow who came to me many years ago. And he had a wonderful business. And he had been worried because he had seen a friend of his die.

And the problems that arose later when the managers, to some extent, tried to take advantage of the widow. And it became a disaster.

So he said he thought about it a lot the previous year. And he decided he didn’t want to sell the business to a competitor, who would be a logical buyer, because they would fire all of his people. And the CFO that would remain, and, you know, all up and down the line, they’d all be the acquirer’s people. He didn’t want to do that to his people.

And then he thought, and he didn’t want to sell it to a private equity firm, because he thought they’d leverage it up. He never liked to leverage that much, and then they’d just resell it later on to somebody, so it would be totally out of control of what he wanted to do.

And he wanted to keep running it himself. So he said, “Warren,” he said, “It isn’t that you’re such a great guy,” he says, “It’s you’re the only one left.” So — (Laughter) —

Berkshire will continue to be the only one left in many cases.