Berkshire Hathaway Shareholders Pepper Warren Buffett With Some Hard Questions

By Anupreeta Das And Erik Holm

Shareholders of Berkshire Hathaway Inc. made Warren Buffett work a little harder than usual for their loyalty at Saturday's annual meeting.

Along with questions about investing and the markets, shareholders probed Mr. Buffett and Berkshire Vice Chairman Charlie Munger about Berkshire's relationship with 3G Capital and its investments in International Business Machines Corp. and Coca-Cola Co. One shareholder also asked Mr. Buffett to rebut accusations that Berkshire subsidiary Clayton Homes Inc. engages in predatory lending practices.

Since 2013, Berkshire has partnered with 3G Capital, an investment firm with offices in New York and Brazil, on three large acquisitions, including ketchup maker H.J. Heinz Co. Mr. Buffett, who is friends with 3G co-founder Jorge Paulo Lemann, has said he would like to do more friendly deals with the firm.

3G, whose founders are also among the controlling shareholders of beer giant Anheuser Busch InBev, has developed a reputation for being efficient but also ruthless, cutting costs and laying off people at the companies it acquires to boost margins and improve performance.

Mr. Buffett, meanwhile, has historically been viewed as averse to layoffs and other cost reductions at the companies Berkshire owns. That's not to say that Berkshire subsidiaries haven't laid off workers, but those instances have been relatively infrequent in the conglomerate's 50-year history under Mr. Buffett's reign.

The questions about 3G mainly had to do with whether Mr. Buffett's approach to and philosophy of business meshed with 3G's.

One shareholder called 3G's moves "brutal" in an email read aloud by Carol Loomis, a retired Fortune magazine journalist who was on a panel asking questions of Mr. Buffett and Mr. Munger. The question was about whether Mr. Buffett no longer "aspired to balance capitalism and compassion."

Mr. Buffett said 3G had bought some companies staffed with "considerably more people in the job than needed," but that the layoffs spurred those same companies to perform "exceedingly well." He cited the strong first-quarter results of Canadian coffee-and-doughnut chain Tim Hortons, which was purchased by 3G-sponsored Burger King with Berkshire's financial backing.

"I don't know of any company that says, as a policy, 'we will have more people than we need,' but a lot of companies ended up that way," he said, adding that 3G optimizes the workforce in those instances.

Another 3G-related question focused on whether, if 3G ran Berkshire, the conglomerate's 80-odd subsidiaries would be subject to layoffs and consolidation.

Mr. Buffett said there were probably some Berkshire businesses that would end up with fewer jobs, but that by and large the subsidiaries were efficiently run. Although he defended 3G, he also tried to distinguish between its businesses and those that Berkshire buys, saying that most Berkshire-owned businesses were well-run to begin with.

He said Berkshire-owned Geico, the country's second-largest auto insurer, "is run just as efficiently as 3G would run it." Berkshire's newspaper operations are cutting costs as the industry continues to struggle with falling subscriptions. Meanwhile, Berkshire's headquarters in Omaha are famously lean, with just 25 people. "We could have had 500," he said.

Mr. Munger, 91, was asked whether IBM, of which Berkshire owns about 8%, was a "cigar-butt" stock. The term refers to a company that is a good value investment, but with only a couple of puffs left--the kind of company Berkshire Hathaway was in 1965 when Mr. Buffett bought control of the struggling textile mill.

Over the next five decades, Berkshire morphed into one of the world's largest companies, with operations ranging from insurance to a railroad. Berkshire also owns more than $110 billion of stocks, with more than half of that portfolio invested in IBM, Coke, Wells Fargo & Co. and American Express.

Mr. Munger said IBM wasn't a cigar butt, but instead an "enormous enterprise" that has adapted as technology has changed. Although recent developments in computing have brought mixed success to the company, Berkshire had bought IBM at a "reasonable price."

Another Berkshire investment, Coke, has been grappling with changing consumer behavior as people move away from fizzy drinks amid a growing awareness of the harmful effects of sugar. That spurred a question from a shareholder, who asked if the beverage maker's "moat"--a term used by Mr. Buffett that means competitive advantage--was narrowing.

Mr. Buffett said he expected food and beverage companies will adjust to the preferences of consumers over time. That is also his rationale for agreeing to buy Kraft Foods along with 3G earlier this year, and merge it with Heinz.

Then, playing up his notoriously unhealthy diet, which involves the consumption of copious amounts of Cherry Coke and sugary confections, he said: "If I lived my whole life eating broccoli and Brussels sprouts, I probably wouldn't live as long."

Mr. Buffett, 84, has been a hero to Berkshire shareholders for decades, having made many of them extremely wealthy as the conglomerate's stock price has soared. He also is followed closely by hundreds of money managers, especially value investors, who regularly parse his letters and comments for insights.

The Q&A with Mr. Buffett and Mr. Munger is the highlight of the meeting, with shareholders, analysts and a panel of journalists getting to ask the duo questions for nearly six hours. Both men have by now developed a routine, with Mr. Buffett usually taking a stab at the question and then turning it over to Mr. Munger, whose responses are typically brief.

Shareholders and other attendees, including hundreds of people from outside North America, lap up the mix of wit and wisdom. This year, Berkshire has estimated more than 40,000 people are attending.

Write to Anupreeta Das at anupreeta.das@wsj.com and Erik Holm at erik.holm@wsj.com

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