The Pritzkers: Buffett's Blueprint
Your only immortality is the impact you have on your successors. - Nicholas Pritzker
Turns out some deals are actually done on napkins. In 1957, a young dealmaker sat in a coffee shop, Fat Eddie’s in Los Angeles, and did exactly that. What sounds like a scene out of Pulp Fiction was a milestone in one of America’s largest family fortunes.
The coffee shop was part of the new Hyatt motel, named after its owner Hyatt von Dehn. The Hyatt was strategically placed by the airport. And it was busy. Sipping on his coffee, young Jay Pritzker must have had a moment of Strategic Intuition. Jay was the deal-making scion of the Chicago-based Pritzker family and, according to Sam Zell, “just the smartest businessman” he’d ever met.
Jay recognized the growth in air and business travel and the demand for quality hotels near major airports. He pulled out a pen and scribbled his offer on the napkin: $2.2 million. Within two years, Hyatt House hotels opened near the San Francisco and Seattle airports.1 The Hyatt chain became one of the cornerstones of the Pritzker portfolio. The rest? A diversified conglomerate, Marmon Holdings, which in many ways served as a blueprint for Buffett’s Berkshire Hathaway.
I’ve bumped into the Pritzker name again and again. For example, last year Charlie Munger talked about “old man Pritzker” who switched from practicing law to doing deals, just like Munger did years later. The first Pritzker in Chicago was Nicholas who left Kiev in 1881 and worked as a pharmacist before becoming a lawyer. His three sons joined his law firm, Pritzker & Pritzker. One of them, Abram (Abe, A.N.), quit during the Great Depression to start doing deals.
He was a compulsive negotiator who always had an envelope ready on which to scribble the terms he was offering. He invested in small companies in the Chicago area and hotels in cities as far afield as Havana. His big winner was Cory Corp., an appliance maker he bought with a friend for $25,000 in 1942. In 1967 they sold it to Hershey Foods for $23 million. — Fortune on A.N. Pritzker
Early business education took place “around the dinner table” where A.N. discussed his deals or quizzed his children with math problems (a pattern I first noticed in From Predators to Icons). “I grew up watching my mom and dad selling rooms in our motels,” Jay recalled. “We had CEOs coming to our house so that my dad could persuade them to have their executives stay in Hyatt hotels.”
A.N. also did something unique. He wrote a small book with the theme ‘your only immortality is the impact you have on your successors.’ It seems his effort to preserve a set of family values was successful as several generations later, the Pritzkers are one of the U.S.’s preeminent business and political dynasties with an estimated combined net worth north of $36 billion.
The Original Berkshire Hathaway
During his time working for Ben Graham, Buffett worked on the Rockwood deal, an arbitrage situation created by Jay Pritzker. Importantly, Buffett made it a point to attend the company’s shareholder meeting and meet Pritzker. In The Snowball, Alice Schroeder concluded that Buffet “had studied not just the numbers but Jay.” Buffett noted that Pritzker had “operated quite fast in the past.”
He bought the Colson Corp. a couple years ago and after selling the bicycle division to Evans Products sold the balance to F. L. Jacobs. He bought Hiller & Hart about a year ago and immediately discontinued the pork-slaughtering business and changed it into a more or less real estate company.
Turns out Colson was Pritzker’s Berkshire, a turnaround situation that evolved into a diversified holding company through the power of disciplined reinvestment. Jay had become the key figure in building the Pritzker empire and was affectionately called a “deal nymphomaniac”.
Older investment bankers recall how awed they were as young men to pick up the phone and have Jay Pritzker tell them he was downstairs and could he come up for a chat? He'd sit in their offices and pepper them with questions and listen intently. And he would do them little favors. It was how he won loyalty and why they brought him deals before they showed them to anyone else.
However, Jay also had a secret weapon and important partner: his brother Bob, an “engineer in a family of lawyers”, and the mind behind operations and complex turnarounds.
In 1953, … Jay [acquired] buy Colson Co., a small manufacturer in Elyria, Ohio, that badly needed help. Jay's brother Bob, then 26, moved immediately to Elyria. He had an industrial engineering degree from Illinois Institute of Technology and six years' experience at production jobs in factories owned by others. He began restructuring Colson, which had annual sales of $5 million in tricycles, missile subassemblies, and casters for carts and dollies.
He jettisoned the tricycles and rocket parts and moved the growing caster business out of antiquated facilities in Elyria to a new plant in Arkansas. By the time Colson was back on track, Jay had bought another small, badly run company in another small town. Over and over the pattern repeated itself: Jay bought companies, Bob made them worth owning.
The Pritzker Method
Jay’s death in 1999 was followed by a bitter rift and lawsuit among the following generation. The family’s fortune was divided and in 2008, the family sold Marmon to Berkshire. Buffett reminisced about the kindred spirit at the time of purchase: “Our transaction was done just the way Jay would have liked it to be done – no consultants or studies.”
The more I studied the Pritzkers, the more it seemed like Marmon served as a blueprint for what Buffett did at Berkshire, with two exceptions. Buffett added insurance float as a source of leverage whereas the Pritzkers relied on bank relationships. I didn’t find much on it but it seems like an example of an edge:
Jay benefited from A.N.'s special relationship with the First National Bank of Chicago, which was eager to lend money to the son of a favored customer. Says Jay: “Because of Dad I could get anything from the bank, even if the request was unreasonable.” In 1953, the bank loaned Jay around 95% of the several million dollars he required to buy Colson Co., a small manufacturer in Elyria, Ohio, that badly needed help. — Fortune, 1988
Buffett also had no operating partner to handle turnarounds (and no desire for the constant conflict). He shifted decisively to buying great companies that didn’t need much operational involvement from him. Other than that, see if the following Pritzker formula reminds you of the Berkshire model.
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