With Jefferies Deal, a \'Baby Berkshire\' Goes Where Buffett Hasn\'t

For years, Ian Cumming and Joseph Steinberg prided themselves on being disciples of Warren E. Buffett, fashioning Leucadia National into something that investors have called a “mini Berkshire Hathaway.”

But on Monday, the two made one of their biggest deviations from Mr. Buffett's playbook to date. They bought an investment bank outright.

By buying the remainder of the Jefferies Group, Mr. Cumming and Mr. Steinberg are adding a growing investment bank to Leucadia's eclectic stable of holdings. It's in line with the Berkshire approach of buying up an array of undervalued companies, in the hopes of creating enormous shareholder value.

It's a business model that Mr. Cumming and Mr. Steinberg have pursued from the beginning. The two men, who were classmates at Harvard Business School, banded together to take over Talcott National in the late 1970s.

Just as Berkshire was a struggling textile maker before Mr. Buffett arrived, Talcott was a far differe nt animal from its current form. It was largely a specialized lender, founded in 1854 with a history that included helping finance sock purchases for the Union Army during the Civil War.

Rather than sell it for parts, as others had expected, Mr. Cumming and Mr. Steinberg instead chose to use it as their own investment platform. The two renamed the company Leucadia, after the seaside town in California, while driving up from San Diego in 1980.

Leucadia then turned into an enormously acquisitive deal machine, with Mr. Cumming and Mr. Steinberg acquiring reputations for being intelligent stock pickers. The company has orchestrated 28 takeover since 1994 alone, according to Standard & Poor's Capital IQ.

The target companies span a broad range of industries, from telecommunications (WilTel Communications) to hospitality (the Hard Rock Hotel and Casino in Biloxi, Miss.) to food (National Beef Packing). Leucadia also owns a wine producer, the Crimson Wine Group, t hat the company intends to spin off to its shareholders.

Financial services continued to be a core area of investing. It owned about 25 percent of AmeriCredit, an auto finance lender that caters to low-income borrowers, when the firm was sold to General Motors for $3.5 billion two years ago.

Leucadia actually teamed up with Berkshire to buy the Capmark Financial Group's commercial loan origination and servicing business three years ago, forming a joint venture known as Berkadia Commercial Mortgage.

Leucadia's ties to Jefferies stretch back years, with Mr. Steinberg having befriended the investment bank's chief executive, Richard Handler. Leucadia first invested in Jefferies in 2000 and subsequently increased its stake to nearly 29 percent.

The company has shown a fondness for reducing its tax bill, amassing tax assets like net operating losses that will be put to use helping Jefferies' earnings.

Such is the appreciation of Mr. Buffett's style at Leucadia that the company even follows the Berkshire model of a minimal Web site and long annual investor letters with musings on the current state of the markets and the world more broadly.

But unlike Berkshire, whose investments include blue-chip stocks like Coca-Cola and Burlington Northern, Leucadia doesn't necessarily focus on operating companies that throw off tons of cash. Instead, its investments tend to be more speculative bets.

And while Mr. Buffett has invested in banks before - he famously took stakes in Goldman Sachs and Bank of America - he has shied away from owning one entirely. Indeed, he has criticized investment banks for being opaque and being highly indebted, and was famously burned by an investment in Salomon Brothers. He has instead seemed content to either own firms seen as much safer, like Wells Fargo, or to offer rescue investments that yield lucrative dividends.

Still, shareholders have proved largely loyal to Mr. Cumming and Mr. Steinberg, even when the company's stock 55 percent in the immediate aftermath of the financial crisis. In December 2008, one investor told Barron's: “I don't think that they suddenly took stupid pills.”

But all partnerships must come to an end, and the Jefferies deal allows for a change in leadership at Leucadia. Mr. Handler will become chief executive of the combined company, while Mr. Steinberg will become chairman.

And Mr. Cumming, who was responsible for the idea behind Leucadia, will step down as chairman and chief executive, though he will hold onto a seat on the board.

He made no secret of his admiration for his successor, Mr. Handler, citing Jefferies' ability to assuage investors fears about the investment bank's holdings of European government debt as a good sign for Leucadia's future.

In a statement, Mr. Cumming said of Jefferies' leadership: “Their ability to manage and grow Jefferies through the elongated financial bubble, success fully navigate the crises that followed where others could not, and protect the firm from the attacks based on false information exactly one year ago with deftness and grace, should comfort all!”