NetJets under new leadership after Sokol resignation
On March 28, David Sokol resigned from his job as chairman of several Berkshire Hathaway-owned companies, including fractional-share provider NetJets. NetJets president Jordan Hansell took over as chairman and CEO. Sokol had indicated interest in resigning from Berkshire Hathaway on two previous occasions, according to a statement by Berkshire Hathaway chairman Warren Buffett, “most recently two or so years ago,” but he was able to persuade Sokol to stay on board.
Buffett credits Sokol with turning NetJets around, and earlier this year, Berkshire Hathaway reported profits at its “other services” segment (which includes NetJets and FlightSafety International) as having enjoyed pre-tax profits of $984 million during 2010, versus a $91 million loss in 2009. On March 1, NetJets announced a purchase agreement for up to 120 Bombardier Globals worth up to $6.7 billion. Last October, Sokol surprised NBAA show-goers with an order for 125 Embraer Phenom 300s, reversing an era of cancelled orders and downsizing of the fleet and personnel ranks. At the time, Sokol refused to say whether NetJets had traded in any used jets as part of the Embraer transaction.
Embraer subsidiary ECC Leasing purchased 25 Cessna Citation Ultras late last year, according to an Embraer spokeswoman. While Embraer would not confirm that NetJets was the seller of the Ultras, another source told AIN that these Ultras did indeed come from the NetJets fleet. All of these Ultras are being actively remarketed, the spokeswoman said, although none had been sold as of early April.
Sokol took over as chairman of NetJets in August 2009, after NetJets founder Richard Santulli was forced out of the company. The company was losing millions of dollars per year. Sokol was also chairman of MidAmerican Energy Holdings and Johns Mansville.
“Dave’s contributions have been extraordinary,” Buffett wrote in his statement. “At NetJets, Dave resurrected an operation that was destined for bankruptcy, absent Berkshire’s deep pockets.”
Buffett included additional information in his statement, concerning Sokol’s involvement in Berkshire Hathaway’s purchase of Lubrizol. Sokol first purchased 2,300 Lubrizol shares on December 14. “Subsequently, on January 5, 6 and 7, [Sokol] bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.” Sokol met with Buffett on January 14 or 15 (Buffett doesn’t recall the exact date) to recommend buying Lubrizol. “Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire Board, of which Dave is not a member.”
According to a Securities and Exchange Commission filing by Lubrizol, “On January 25, 2011, Mr. Sokol and [CEO] Mr. [James] Hambrick met in Cleveland, Ohio. The two executives discussed their respective backgrounds and businesses. Mr. Hambrick provided Mr. Sokol with an overview of Lubrizol’s corporate culture, philosophy and operations. Mr. Hambrick also discussed Lubrizol’s overall business and past and expected financial performance and provided Mr. Sokol a package of materials that included Lubrizol’s publicly available past results, forecasts through 2013, Lubrizol’s financial performance for Fiscal Year 2010, as well as internal forecasts for fiscal years 2014 and 2015.”
Berkshire Hathaway announced the plan to buy Lubrizol for $135 per share in a March 14 press release. The value of Sokol’s Lubrizol shares reportedly climbed about $3 million after the acquisition plans were announced. Berkshire Hathaway’s purchase of Lubrizol is expected to close in the third quarter.
“Dave’s letter was a total surprise to me,” Buffett wrote in his statement, “despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.”
Since Sokol’s resignation, a Berkshire Hathaway shareholder has filed a lawsuit seeking return of return of any improper gains from the Lubrizol situation and Berkshire Hathaway leaders to recompense their company for damage caused by Sokol’s actions.
One industry expert, who asked not to be identified, believes that Sokol’s tenure at NetJets was positive. “I think the company’s in good shape,” he said. “It’s on an upswing. NetJets is better than [it was] before he came.”
However, cautioned Kenneth Ricci, principal of Directional Aviation Capital, which owns fractional operator Flight Options and other aviation entities, “I can tell you from experience [having left Flight Options in 2003 and then returning in 2008] that when leadership changes in any organization, it will take 12 to 18 months for the company to react and adapt. And, the greater the difference in the leadership styles between the existing leader and the incoming leader, the longer it will take for the organization to adapt.
“So, any company, including NetJets, will have its smooth flow of business disrupted by the change in leadership. I can also say that both NetJets’ and Flight Options’ growth and success have been at their peak when they were led by leaders who are passionate about, and committed to, the aviation business. That is what is unique about our industry.” o