Johns Manville
Company Overview
Johns Manville is a leading manufacturer of insulation, roofing materials, and other building products, headquartered in Denver, Colorado. Berkshire acquired Johns Manville out of a bankruptcy reorganization in 2001 for approximately $1.8 billion — a unique situation where the prior company had been bankrupted by asbestos litigation, but the new entity was structured to be free of those obligations.
Investment Story
2001: Post-reorganization acquisition. Johns Manville's predecessor had filed for bankruptcy decades earlier due to massive asbestos-related litigation. By 2001, the reorganization was complete: the new Johns Manville entity was free of asbestos obligations (those were handled by a separate trust), and the remaining business — insulation and building products — was a genuine industrial leader with strong market positions.
Building products market position. Johns Manville holds leading positions in fiberglass insulation (one of three dominant brands alongside Owens Corning and CertainTeed), roofing products, and pipe insulation. These products are specified by architects and builders and tend to change slowly — brand relationships in building products persist for decades.
Construction cycle sensitivity. Building products volumes track U.S. housing starts and commercial construction activity, making JM moderately cyclical. However, the professional specification model — where insulation brand decisions are made by architects and builders rather than price-shopping end consumers — provides some pricing stability even through construction cycles.
Buffett's Own Words
Finally, in late December, we agreed to buy Johns Manville Corp. for about $1.8 billion. This company’s incredible odyssey over the last few decades too multifaceted to be chronicled here was shaped by its long history as a manufacturer of asbestos products. The much-publicized health problems that affected many people exposed to asbestos led to JM’s declaring bankruptcy in 1982. Subsequently, the bankruptcy court established a trust for victims, the major asset of which was a controlling interest in JM. The
Finally, in late December, we agreed to buy Johns Manville Corp. for about $1.8 billion. This company’s incredible odyssey over the last few decades too multifaceted to be chronicled here was shaped by its long history as a manufacturer of asbestos products. The much-publicized health problems that affected many people exposed to asbestos led to JM’s declaring bankruptcy in 1982. Subsequently, the bankruptcy court established a trust for victims, the major asset of which was a controlling interest in JM. The
Shaw and Johns Manville. Then we acquired two others, MiTek and XTRA, and contracted to buy two more: Larson-Juhl, an acquisition that has just closed, and Fruit of the Loom, which will close shortly if creditors approve our offer. All of these businesses are led by smart, seasoned and trustworthy CEOs. Additionally, all of our purchases last year were for cash, which means our shareholders became owners of these additional businesses without relinquishing any interest in the fine companies they already owned. W
*Loom from April 30, 2002 and Garan from September 4, 2002. (2) Includes Johns Manville from February 27, 2001 and MiTek from July 31, 2001. (3) From date of acquisition, January 8, 2001. Here’s a summary of major developments at our non-insurance businesses: • MidAmerican Energy’s earnings grew in 2002 and will likely do so again this year. Most of the increase, both present and expected, results from the acquisitions described earlier. To fund these, Berkshire purchased $1,273 million of MidAmerican junior debt *
Moore and MiTek – had record operating earnings last year. And earnings at Johns Manville, the fourth, were trending upward at yearend. Collectively, these companies earned 21.0% on tangible net worth. • Shaw Industries, the world’s largest manufacturer of broadloom carpet, also had a record year. Led by Bob Shaw, who built this huge enterprise from a standing start, the company will likely set another earnings record in 2004. In November, Shaw acquired various carpet operations from Dixie Group, which should a
Investment Lessons
Bankruptcy creates opportunities to acquire clean versions of historically burdened businesses. Johns Manville's asbestos liability had made the company uninvestable for decades despite having an excellent underlying industrial business. The reorganization process separated the legacy liability from the operating business, creating a clean entity acquirable at prices that reflected the residual uncertainty without fully reflecting the business's earning power. Identifying such situations — where asset quality is genuine but historical burden has created an investment opportunity — is a legitimate source of investment edge.
Building products brand specifications create customer relationships that persist. An architect who specifies Johns Manville insulation in a building design has evaluated the product once — the specification then persists throughout the project and often becomes the default in future similar projects. This specification-selling model creates customer relationships at the professional level that direct competitors rarely dislodge purely on price.