Financial experts were unable to prevent a Berkshire Hathaway subsidiary, Precision Castparts Corp. (PCC), from acquiring a German family business for five times as much as the collapsing company was worth, recent articles in the New York Times and the German newspaper Handelsblatt report. PCC is fighting to undo a deal that a tribunal found was based on trickery and deception by the seller.
Pervasive wrongdoing: In February 2016, Berkshire Hathaway bought PCC, an Oregon company specializing in manufacturing aircraft parts as well as products for the oil and gas industry. In summer 2016, PCC learned from an investment bank advising small and midmarket companies “in the German speaking regions” that the midsize company Wilhelm Schulz was for sale. Schulz, which is set up as three holding companies primarily owned by the Schulz family, manufactures pipes. PCC was interested and entered into negotiations. Handelsblatt reports that Schulz was described as part of a growth industry. Assuming revenue of €258.4 million in 2016, it could achieve EBITDA of €96 million, an increase of 25% from the year before. The targeted acquisition price was €850 million to €900 million.
Handelsblatt reports that, in actuality, by 2016, Schulz was on the verge of declaring insolvency, finding itself unable to make payment on a credit line it had with Commerzbank. PCC, it seems, was unaware of this fact. At Schulz, a frenzy broke out among top managers when the company learned of PCC’s interest. Handelsblatt notes that managers drafted IT specialists to use Photoshop to fabricate sales orders, invoices, and customer accounts, all efforts to make the numbers look good. In fall 2016, while PCC’s financial team was conducting due diligence at the company, Schulz’s accounting system broke down for five days, Handelsblatt reports. PCC now surmises that this was no coincidence, Handelsblatt says.
PCC and Schultz came to an agreement in December 2016, and the transaction closed in February 2017. Handelsblatt reports that PCC paid €800 million, 9.1 times the claimed EBITDA. Over €360 million went to Commerzbank, to which Schulz was deeply indebted. In comments to Handelsblatt, in May 2017, Ted Weschler, Warren Buffet’s investment manager, spoke with confidence about the recent deal. Regarding the difficulty of doing a transaction involving a foreign entity, foreign language, and foreign legal structure, he said it all came down to building trust and developing a sense of just how honest your counterpart’s intentions were. However, by that time, PCC had already received an email from a Schulz whistleblower, sounding the alarm about the questionable activities that went on at the company to make its performance look better than it was.
PCC began an internal investigation, but, according to Handelsblatt, those involved in the scheme, including top management, did not change course. Ultimately, PCC fired the management team and, by 2017, discovered the scope of the deception when it brought in forensic accounting experts to investigate.
According to the Times, a private tribunal in April 2019 found that the Schulz team had “engaged in a pervasive effort to present a fundamentally misleading picture” of the company’s condition. The tribunal awarded PCC €643 million in damages, the measure being the price PCC paid less the actual value of Schulz at the time of the sale.
It seems the Schulz team has appealed the ruling with the Southern District of New York. Schulz claims the company’s dismal situation is the result of the buyer’s failure to understand the company’s concept for success as well as the decision to fire managers in key positions.
PCC has filed suit in Krefeld, Germany, where Schulz is located, to recoup the €800 million PCC paid for the company. Handelsblatt says a criminal investigation against the current owner, Wolfgang Schulz (son of Wilhelm Schulz, the founder), is also underway.