Buffett's Investments: General Dynamics

The company was the second largest defense contractor in the U.S. in the year 1990. Buffett purchased General Dynamics in 1992.

Institutional imperative

Anders, the CEO of the company in 1992 had realized that the company cannot diversify in non-defense businesses and even in defense products, the company needs to be in products that have franchise-like products and could achieve critical balance between research and development and production capacity. The rest of the business would be sold off. In less than 6-months the company raised $1.25 billion selling non-core businesses.

Now with cash in hand, the company decided to first meet the liquidity requirements and then cut down debt to ensure financial stability. After making the balance sheet appropriate, the company went ahead with share buybacks.

Rationality

Buffett’s purchase of General Dynamics was a different one. Neither was the business simple to understand, was government control, did not have favorable long-term prospects nor was generating high ROE. Then why did Buffett purchase it? Well, as the author finds out that Buffett initially thought of purchasing the company as an arbitrage opportunity as the company had announced a buyback. However, as he studied more about the company and got to know Anders (the CEO), he was mesmerized by his rational and well-articulated strategy of disinvestment.

Additionally, the company was available at below the book value, hence was a value buy. From 1992 to 1993, for its investment of $72, Buffett received $2.60 in dividends, $50 in special dividends and the share price had risen to $103.