How Warren Buffett helped save Harley-Davidson

Berkshire Hathaway offered a high-interest loan to the motorcycle manufacturer 5 years ago to keep its financing operations afloat. It all paid off in the end.

By MSN Money Partner Apr 25, 2014 2:07PM
A Harley Davidson motorcycle during the company's 110th anniversary celebration in Milwaukee, Wis., on Thursday (© Morry Gash/AP)By Elizabeth G. Olson, Fortune

The occasional doubts that crop up over Warren Buffett's investment prowess were laid to rest this week -- again -- by, of all companies, Harley-Davidson (HOG), the iconic Milwaukee motorcycle maker.


A business deal struck five years ago between the two renowned Midwestern entities -- Buffett's Berkshire Hathaway (BRK.A), in Omaha, and Harley-Davidson -- infused $303 million into the motorcycle maker to help keep loans available to purchasers and dealers as credit markets sank along with the economy. The interest rate: 15 percent.


Harley-Davidson paid back the loan in February, said chief financial officer John Olin during a conference call this week announcing its first-quarter earnings.


The company took the high-interest loan, Olin said, to help finance buyers and keep its production lines and dealerships operating. It was the only way, he said. This way, the company -- which was founded in Wisconsin just after the turn of the 20th century -- could borrow money and, at the same time, keep its ownership intact.


"It was the bridge we needed to get us through a rough time," Olin said. Between 2007 and 2009, sales of Harley's classic motorcycles -- celebrated for their heavyweight, outlaw biker image -- plummeted, down as much as 50 percent in the United States, as people had far less disposable income for purchases, or even for gasoline.


As the company began to climb back from the near-abyss, it wanted to repay its high-interest loan ahead of schedule, but Berkshire Hathaway struck a harder bargain, sticking with the handsome five-year loan terms, according to Harley-Davidson. 


No wonder, as the loan earned millions for Buffett, who already had chalked up a stellar windfall by investing a whopping $5 billion in shares of Goldman Sachs (GS) as the financial system teetered in the fall of 2008.


That loan had a 10 percent interest rate, and, like the Harley loan, came at a key time for the investment bank, which repaid the loan in 2011 -- after paying about $500 million in interest.


While the loan to Harley-Davidson was also highly lucrative for Berkshire Hathaway, it drew much less attention than the one issued to Goldman Sachs, which became part of a key insider trading trial in which prosecutors accused former Goldman board member Rajat Gupta of helping hedge fund founder Raj Rajaratnam make $1 million by tipping him off to the Berkshire infusion before it became public.


Berkshire Hathaway -- which has taken stakes in other noted American brands like Coca-Cola (KO), and always on good repayment terms -- invested $300 million in the troubled chopper manufacturer in 2009. At the same time, Davis Selected Advisers LP, Harley-Davidson's biggest shareholder, also sank $300 million in unsecured loans into the company.


Despite twists and economic downturns as far back as the Great Depression of the 1930s, and then the onslaught from Japanese motorcycle makers in the 1970s and 1980s, Harley-Davidson celebrated its 110th anniversary last year -- on the upswing.


Its iconic status seems to be intact. A 2013 Harley-Davidson given to Pope Francis last year by a grandson of the company's founder to mark the company's anniversary was sold recently for $327,000 at a Paris auction. Its regular price tag: around $16,000.


In its most recent earnings report, Harley said that it sold 57,415 motorcycles worldwide during the first quarter of 2014, a 5.8 percent increase over the same quarter last year. This boosted total company revenue by 10 percent, with earnings up by 22 percent.


Much of the growth came from international sales, which increased 10.9 percent over the prior year. Sales in the United States grew by 3 percent as the company, accustomed to marketing to middle-aged men, made inroads among women, African-American, and Hispanic consumers.


The company also won over buyers by releasing new models that dovetail with its reputation for retro styling. After a five-year hiatus, it brought back the Low Rider -- a remake of the original first introduced in 1977 -- and other models for urban riding and long-distance touring.


More from Fortune


54Comments
Apr 25, 2014 2:47PM
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Only in America does someone think having to pay for a loan is a "sharking". Obviously it worked out and Harley and Buffet are making money so I guess it was a good deal for all involved.

PS, I have 4 credit cards with higher interest then 15% and have never been on the verge of bankruptcy so I say it was more then fair.

Apr 25, 2014 3:02PM
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Loan sharking or not, HD would have gone elsewhere if better terms were found available elsewhere.
Apr 25, 2014 3:32PM
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Meanwhile, in other April news, Buffett-owned Fruit of the Loom shipped another 600 American jobs overseas to take advantage of slave-labor wages and no environmental constraints.

What a guy.  

Apr 25, 2014 4:03PM
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Harley Charges so much for their bikes its crazy! Maybe sell an affordable bike and then they wouldn't have to worry! $30000 is f....ing nuts for a stupid unreliable bike.
Apr 25, 2014 4:06PM
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as for the reporter that wrote this story,Harley "DOESN'T MAKE CHOPPER'S" ,you are a MORON,get your facts right,you know that you can get the right information from  the "INTERNET".choppers are built in garages and small shops all across the world,plus there are companies like Orange County Choppers that build them from the ground up using engines from more sources then Harley!

 

Apr 25, 2014 4:35PM
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Our Bigger Lawnmowers, have electric starts; Glad they do, because I don't want to be pulling on a gdamn rope.....Still start rototillers that way.


When you age and have a couple extra dollars, you are going to want stuff with push buttons or turnkeys...

And I don't see anything NON Macho, about it..

Apr 25, 2014 3:08PM
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I'm a previous HD owner and I'd rather ride an "85" LTD 1000 Kaw any day.
Apr 25, 2014 3:45PM
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I guess I was a lucky one . . . Back when Buffett was only a small blurb on the internet as he made the deal with H-D, I also "bought in" with $50,000. thru my broker, getting H-D @ $8.53 a share . . .Not a bad return today, and, yes, it fluctuates, so what . . . I made my money . .
Apr 25, 2014 6:40PM
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Who cares?  Harley acts like they are the "great American motorcycle", yet even though they're assembled in Milwaukee, their parts are from everywhere, but the U.S.
Apr 25, 2014 4:54PM
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hey buffett,how about saving some of those homes from wells fargo,the giant predator of which you are a shareholder,so that some poor people do not have to fragment their families or even worse,destroy their families.
Apr 25, 2014 5:53PM
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Buy a used Hog, the bugs will be out of it when you do.Let the sucker buy a new one.
Apr 25, 2014 4:53PM
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I guess people are only considering the "present times" as far as high risks loans...?


Usury rates vary State to State, but normally most limits are around 21-25%, above that may be considered "loan sharking."

Buffet and Davis Advisors LP may have done a great service to Harley D...Sounds like it according to their CFO John Olin....

The outcome might have been different, like HOG going bankrupt...Then who would you blame?


Not long ago during the Admins of Ford, Carter and Reagan,(thereabouts) loan rates were 15-18% for a party to buy a home, mortgage or property and other items. 

So everything is relative and 15% for "unsecured loan" or high risk is hardly "loan sharking."

Apr 25, 2014 4:47PM
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15%.............   Thanks a lot. 
Apr 25, 2014 6:19PM
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He should have let HD die, the world would be a better place without their crappy bikes that haven't advanced since 1955.
Apr 27, 2014 6:10PM
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A couple of years ago, I was stopped at a red light (left side of the left lane) when a brand new hawakazki pulled up on my right. A car with two 25 to 30 year old guys pulled up in the right lane and yelled "nice Harley!". The guy on the ymasuwaki got all grumpy looking, as I thanked them.
Apr 25, 2014 7:33PM
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WAAAAA WHOOOOOO, LOVE ME A HARLEY!!!!!!!  WELCOME BACK!
Apr 25, 2014 4:39PM
Apr 25, 2014 3:36PM
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HD should have just taken a bailout like GM and Chrysler. That would have been a much better deal. 15% is gouging in todays loan rates.
Apr 25, 2014 3:13PM
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So what should have Buffet done? Give HD the money just because people like you are hung up on motorcycles with 1950s technology and very un-reliable service records??? FYI I am a long haul truck driver who owns a Ducati 999R Fila and during the riding season I see usually several HD's per day broke down on the side of the interstate with the riders/owners on their cell phone's looking lost and frustrated. And last year I saw one Japanese bike (a Yamaha FJ1300) stopped on the side of the road with (guess what) a flat tire. And no Italian, British or German bikes whatsoever. ln the late 1960s I owned a 1964 XLCH and a 1952 Hydraglide with a tank shifter but I wanted to ride instead of work on the damn things all the time so I moved on to a Triumph Bonneville and got my wish. SO I honestly have a difficult time understanding the HD thing that has gone on for the last decade or so. As an old friend of mine who stills owns several Pan and Knuckheads told me awhile ago="the worst thing HD ever did was to put electric starters on their bikes=allows all the Chicks and D-head yuppie wanabee's to show up at the HD dealer in their brand new badboy costumes,pay the bill for the oil change,push a button and,Yes, INSTANT  Peter Fonda!!!!
 P.S. 1952 Hydraglides and 1964 XLCH's were both kick start only, AS IT SHOULD BE!=

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