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Controversial Lubrizol Deal Closes

Wednesday, September 21, 2011

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Despite insider trading by a senior corporate officer involved in the deal, Berkshire Hathaway has completed its $9.7 billion acquisition of specialty chemical maker Lubrizol, the world’s largest supplier of lubricant additives.

The closing of the cash transaction makes Lubrizol a wholly owned subsidiary of Berkshire Hathaway, the vast and diverse conglomerate headed by Warren Buffett, “the Oracle of Omaha.”

Lubrizol’s international headquarters will remain in Wickliffe, OH, and the company will continue to be led by chairman, president and CEO James Hambrick.

 Warren Buffett, left and David Sokol, right
Berkshire Hathaway auditors said David Sokol (right), longtime lieutenant to Warren Buffett (left), had made “misleadingly incomplete disclosures” regarding a $10 million Lubrizol stock purchase.
 
Berkshire paid $135 per share for Lubrizol and assumed about $700 million in Lubrizol debt. The per-share price tops Lubrizol’s record-high closing price by 18%.

The agreement gained its last approval—by Chinese regulators—on Friday (Sept. 16).

Trading Rules Violated

The takeover, announced March 14, was quickly clouded by revelations that then-Berkshire executive David Sokol had paid $10 million for nearly 100,000 Lubrizol shares in early January, when he knew Lubrizol’s board had been discussing a possible Berkshire acquisition.

Sokol, then heir-apparent to Buffett, recommended the deal to Buffett and facilitated it before it was announced.

Although Buffett initially defended Sokol, an internal audit by Berkshire soon found that the stock purchase “violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its insider-trading policies and procedures.”

Auditors said Sokol’s “misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the company.”

Sokol resigned March 30 but denied wrongdoing and said he had been made a scapegoat in the deal.

‘Significant Opportunities’

The flap did not slow the deal, however, which was completed on time and greeted enthusiastically by all sides.

Hambrick said the acquisition provided Lubrizol with “real and significant opportunities to continue creating customer value by providing complex and innovative chemistries, formulations and solutions for some of the most demanding performance applications in the world.”

Buffett, in turn, called Lubrizol “a great addition to the Berkshire Hathaway family of companies,” adding: “We expect to see continued strong performance from the company as it executes its growth strategies.”

About the Companies

Founded in 1928, Lubrizol manufactures specialty chemicals for a broad range of applications, including resins and additives for performance coatings, lubricants, metalworking fluids, inks, engine oils and pharmaceuticals. The company has about 7,000 employees worldwide and reported 2010 revenues of $5.4 billion.

 Lubrizol Corp.

 Lubrizol Corp.

Lubrizol provides high-performance additives for a wide range of paints and coatings.

Berkshire Hathaway and its dozens of subsidiaries engage in diverse business activities, including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services. Subsidiaries include Benjamin Moore & Co., Johns Manville, Dairy Queen, GEICO Insurance, Helzberg Diamonds, See’s Candies, the H.H. Brown Shoe Group and, recently, Burlington Northern Railroad.

Market Outlook

The global lubricant market includes industrial oils and fluids; metalworking fluids; industrial natural gas, aviation, marine, and railroad oils; industrial greases; and consumer and commercial engine oils, hydraulic and transmission fluids, gear oils and grease.

A new report by market researcher The Freedonia Group estimates that world demand for the 37 million metric ton lubricant industry will rise 2.6 percent annually through 2015.

Asia will remain the fastest-growing region, followed by the Africa/Mideast region and Central/South America, Freedonia reported. Manufacturing and other markets will outpace the motor vehicle aftermarket, while hydraulic fluids and process oils will be the fastest-growing products.

The global lubricant market was valued at $48.8 billion in 2009.

   

Tagged categories: Acquisitions; Additives; Business matters; High-performance coatings; Lubrizol; Mergers

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