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Warren Buffett, World Book Encyclopedia and Scott & Fetzer

Today Warren Buffett (Trades, Portfolio) is a household name across the United States. Every move he makes is dissected a thousand times by the media, and there are thousands of investors out there who copy his investments.

But it wasn't always that way. Between the 1960s and 1990, Buffett and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) were relatively unfollowed.

I like studying the Oracle of Omaha's actions during this period because they tell us a lot about his investing style when he had less money under management.

Buffett has frequently stated that Berkshire's size today is holding the conglomerate back, but that wasn't the case in the first few decades of his ownership of the business.

Even though he didn't have as much money at his disposal, Buffett still pushed ahead with transformative acquisitions.

One of these acquisitions was the $400 million deal to buy Scott & Fetzer Company in October 1985. As the New York Times reported soon after the deal was announced:

"The Scott & Fetzer Company, which last month dropped a leveraged buyout attempt, said yesterday that it had agreed to be acquired by Berkshire Hathaway Inc. for $60 a share, or a total of about $400 million.

Analysts said that Berkshire Hathaway, which is controlled by Warren E. Buffett, the Omaha investor, was probably attracted to Scott & Fetzer because of its steady cash flow. Mr. Buffett could not be reached for comment.

Scott & Fetzer, which makes Kirby vacuum cleaners and The World Book Encyclopedia, "appears to be a modest growth, but low volatility business," said one analyst, who asked not to be identified. "They have a lot of cash, and they're a steady cash generator."

It appears that Buffett also liked the company's management and the strength of its World Book business. Writing in his 1986 letter to investors, Buffett said:

"Last year I reported to you enthusiastically about the businesses of Scott Fetzer and about Ralph Schey, its manager. A year's experience has added to my enthusiasm for both."

He went on to add:

"World Book's unit volume increased for the fourth consecutive year, with encyclopedia sales up 7% over 1985 and 45% over 1982. Childcraft's unit sales also grew significantly....Selling World Book is a calling. Over one-half of our active salespeople are teachers or former teachers, and another 5% have had experience as librarians. They correctly think of themselves as educators, and they do a terrific job."

The World Book business might have been the jewel in Scott & Fetzer crown back in the mid-1980s, but ten years later, in the mid-1990s, technological change had rendered the product almost obsolete.

At the 1996 Berkshire Hathaway annual meeting of shareholders, when asked about the prospects for World Book, Buffett replied by saying:

"It is not the business it was five years ago. And I don't think it will be the business that it was five years ago, because the world is changed in some ways on that."

However, even though the book business was starting to struggle, the wider Scott & Fetzer business boomed under Berkshire.

According to my research, in the first full year of Buffett's ownership of the company, it reported a net income of around $14 million. According to Buffett's to 1999 chairman's letter, this figure had risen to $92 million by that year.

Over the 13 years of ownership between 1986 and 1999, Scott & Fetzer produced an average net income of $44 million, which on the purchase price of $400 million, gives an internal rate of return of 5.6%.

Over the 16 years to the end of 2002, which is the last year Berkshire reported the division's income separately, Scott & Fetzer produced an average net income of $51.1 million, which on the purchase price of $400 million, gives an internal rate of return of 9.99%.

Over the long-term, Buffett's patience and trust in the management certainly paid off here.

Disclosure: The author owns shares in Berkshire Hathaway.

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This article first appeared on GuruFocus.