How Buffett and Munger Pushed the Buffalo Evening News to Success

- By Rupert Hargreaves

The Buffalo Evening News was one of Warren Buffett (Trades, Portfolio)'s earliest and most significant investments.

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The newspaper was established in 1880 and was managed by a single family until 1974, when the business was put on the market following one of the founding family members' deaths. Buffett and his partner, Charlie Munger (Trades, Portfolio), made an offer for the enterprise on New Year's Day in 1977. The deal was being handled by a newspaper broker, Vincent Manno, in Weston Connecticut.

Buffett's first offer was $30 million. That was a high price because the newspaper had reported a pre-tax profit of just $1.7 million in 1976. However, the sellers initially rejected this offer as being too low. Buffett returned with an offer of $32 million. That too, was rejected.

According to an account of the deal, which was published in Janet Lowe's book, "Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger," Buffett and Munger took some time to discuss their next move for the business. They returned with a slightly increased offer of $32.5 million. This represented around 25% of the net worth of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) at the time, making it a significant deal for the business, which was still in its early stages of development. The offer was ultimately accepted.

Buyers bring in change

The first thing the new buyers did when they acquired the newspaper was launch to remove "Evening" from the paper's name, drop the price and launch a Sunday edition. Munger and Buffett realized that there could only be one newspaper in Buffalo. They took steps to ensure theirs was the one that took over the market.

The newspaper's competitors didn't like this aggressive tactic, so they sued, claiming anti-competitive business practices. This might have been an issue for any other business owners, but not for Munger and Buffett. Munger had an established background in the legal industry. The firm he founded and then left to pursue a full-time career as investor continued to act as an advisor to Berkshire and other corporate bodies around the United States.

According to Lowe's book, Munger relished the legal challenge. One friend noted, "They bought a lawsuit when they bought that paper... But I never did believe they could lose." The book went on to add:

"Munger knew a good buy when he saw it, and his keen sense of what legal points could be lost or won served especially well when he and Buffett acquired the Buffalo Evening News. They knew full well that launching a Sunday newspaper would not be easy and in fact, might instigate an old fashioned newspaper war."

It took two long years for the legal issues to go away. Even then, the News did not immediately turn a profit for its investors. In 1979, the company lost $4.6 million, which Lowe notes was "a large amount of money for two small operators from Nebraska and California."

Nevertheless, the two investors persevered. With the additional capital provided from the other operating businesses at Berkshire and Blue Chip Stamps, they could keep the News alive and fighting. Its competitors did not have these kinds of resources to fund an ongoing price war.

Ultimately, Buffett's paper won out, and it began to earn its keep. By the time Lowe's book was published, it was reported to be "the most profitable newspaper in the United States."

"The Buffalo News is the last remaining metropolitan daily newspaper in Buffalo and serves a 10-county area of western New York with eight daily and three Sunday editions. About 80% of the population read it on Sunday and 64% on weekdays, putting the News among the top 50 newspapers in the country as far as market penetration is concerned...With a daily circulation of nearly 300,000, the company now brings in around $157 million in revenues and $53 million in pre-tax profit."

It's unlikely the paper would have lasted that long without these operators in place who took a disciplined, long term view to the company's future.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.