Dexter Shoe

Summary

A highly competitive, domestic manufacturer of popular-priced men's and women's shoes based in Dexter, Maine. Berkshire acquired Dexter Shoe in 1993 in a stock-swap transaction. Due to foreign competition, the business's competitive advantage evaporated, making it what Buffett would later call his worst-ever capital allocation decision.

Timeline & Key Milestones

• 1956: Founded by Harold Alfond with $10,000 of capital. He is joined by his nephew Peter Lunder in 1958.
• 1993: Acquired by Berkshire Hathaway in November. The purchase is executed via a stock swap where Berkshire issues 25,203 shares (~1.6% of the company) valued at $433 million. The acquisition is brokered by H.H. Brown CEO Frank Rooney. 1993 Letter
• 1994: Merged shoemaking operations are projected to generate over $85 million pre-tax on $550 million in sales. 1993 Letter
• 1999–2001: Earnings collapse as cheap foreign imports flood the U.S. market. Attempts to source shoes offshore fail to save the brand's profitability.
• 2001: Operations are wound down, and remaining assets are integrated into H.H. Brown.
• 2007: Buffett writes a detailed post-mortem, calling the acquisition his most egregious error: "To date, Dexter is the worst deal that I've made... I gave away 1.6% of a wonderful business to buy a business that is now worthless." 2007 Letter

Strategic Importance & The Stock-Swap Folly

At the time of acquisition in 1993, Dexter was viewed as a premier domestic manufacturing business that could compete with anyone. However, the deal illustrates two major lessons in capital allocation:

1. The Impact of Global Trade: A business with strong domestic execution can have its economic castle swept away if low-wage foreign competitors can produce the same goods at a fraction of the cost. The protective moat around Dexter's Maine plants proved illusory.
2. The Dilution of paying in Stock: Paying for a mediocre or deteriorating business in shares of an compounding franchise (like Berkshire) dramatically multiplies the cost of the error over time. Because Buffett paid in Berkshire stock, the relative cost of the mistake grew from $433 million to over $8 billion in forgone Berkshire equity.

🔗 Connections

• Entities: Harold Alfond, Peter Lunder, Frank Rooney, H. H. Brown Company
• Concepts: The Frog-Kissing Princess, Margin of Safety, The Moat
• Sources: 1993 Letter, 2007 Letter