The Danger of Appreciating Currency in M&A
Value investing legend Warren Buffett has made M&A transaction history study material for generations of market participants. While Berkshire Hathaway (BRK.A, BRK.B) is celebrated for compounding shareholder wealth, its historical path includes capital allocation missteps. Foremost among these is the 1993 acquisition of Dexter Shoe Company, a transaction Buffett famously labeled his “most gruesome” mistake.
For modern corporate executives and asset managers, the transaction serves as a primary case study on M&A deal structures. The error was not just misjudging the target’s operational outlook; it was the decision to fund the transaction using Berkshire Hathaway equity rather than cash.
The Mechanics of the $433 Million Stock Transaction
In 1993, Berkshire Hathaway purchased Dexter Shoe Company for approximately $433 million. Rather than deploying cash reserves, Buffett structured the deal as a stock-for-stock exchange, issuing 25,203 Class A equivalent shares to the sellers. At the time, Dexter Shoe possessed a strong domestic market share and profitable financial statements. Buffett assumed the company possessed a durable competitive advantage.
However, within a decade, foreign competition and cheap international manufacturing decimated Dexter’s competitive positioning. The business model became obsolete, and the operational value of the company effectively went to zero. In M&A terms, the acquired asset depreciated entirely.
The financial damage was amplified by the currency used for payment. Because Berkshire Hathaway shares represent ownership in an appreciating portfolio of businesses, their intrinsic value increased exponentially. In his 2014 letter to Berkshire shareholders, Buffett noted that the shares traded to acquire Dexter had risen to a value of approximately $5.7 billion, writing: “As a financial disaster, this one deserves a spot in the Guinness Book of World Records.” With Berkshire Class A shares trading above $780,000 today, the absolute opportunity cost of those shares is far higher.
Capital Allocation Strategy Under Greg Abel
The operational failure of Dexter Shoe reinforced the strict M&A parameters Berkshire Hathaway uses today. Using stock as acquisition currency creates equity dilution that permanently shifts the cost structure of the deal. If the acquired business fails to deliver long-term value, M&A dilution irreparably destroys shareholder value.
This history informs the strategic choices of Greg Abel, who assumed the CEO role at Berkshire Hathaway at the beginning of 2026. Berkshire’s recent $6.8 billion acquisition of Taylor Morrison Home was structured as an all-cash deal, reflecting a corporate policy of deploying capital reserves rather than issuing new shares. This M&A framework helps protect Berkshire’s equity from dilution, ensuring M&A moves do not repeat the structural errors of 1993.
Frequently Asked Questions
Why did Warren Buffett call the Dexter Shoe acquisition his worst mistake?
Buffett called it his worst mistake because he used Berkshire Hathaway stock, an appreciating currency, to buy a business that ultimately went bankrupt due to foreign competition. The opportunity cost of the shares issued is valued in the billions today.
What is the difference between buying a company with cash versus stock?
A cash transaction caps the acquisition cost at the cash paid. A stock transaction dilutes existing shareholders and ties the transaction cost to the future performance of the buyer’s stock, which can exponentially increase the price if the buyer’s stock appreciates.
How does Greg Abel’s strategy reflect the lessons of the Dexter deal?
Greg Abel, taking over in 2026, prioritized cash reserves for major transactions, such as the $6.8 billion purchase of Taylor Morrison Home. This M&A framework preserves Berkshire equity and prevents M&A dilution.
