BookWatch: How Norway’s Warren Buffett has banked 30% yearly gains since 1987

Kristian Siem is considered by many to be the Warren Buffett of Norway. Since 1987 Siem has compounded his money at a rate of about 30% annualized, increasing his worth from about $5 million in 1987 to around $2 billion by 2014. He has done this by focusing on two relatively narrow sectors: offshore drilling and shipping — about which he has extensive knowledge.

Siem, 67, has a long track record of private and public investment in both oil and gas and shipping. He made his name and his fortune by buying undervalued assets, a story that begins in the late 1970s when Siem, not yet 30 years old, came upon a rare opportunity in the offshore drilling industry. The Haakon Magnus, a semi-submersible drilling rig, had been seized by its lender after its owner’s default. The rig, which had been built for $37 million, could be had for $22 million. Siem, who described himself as a consultant, didn’t have $22 million. He had little more than a business card and an office in the spare room of a small shipping company owned by his godfather.

Siem also had a reputation as being an expert in offshore drilling. His business school thesis had been on the transportation of liquid natural gas (LNG), and after graduating, Siem had been hired by Fred. Olsen, a Norwegian shipping industrialist and head of the Fred. Olsen Group.

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But the Haakon Magnus deal was problematic from the start. After Viking Offshore, its owner, defaulted, Chemical Bank foreclosed on the drilling rig. The bank needed $22 million to clear the debt. Siem could borrow the $22 million, but would also need an additional $4.5 million in working capital to operate the rig. That money would have to come from outside investors. Siem contacted the head of the oil division at Norcem, Jan Tore Odegard, whom he had consulted in the past. On the telephone, Siem said to Odegard:

You want to get into offshore drilling? Come into Haakon Magnus. I will give you 15% of $4.5 million in equity, which is a very small investment. And I’ll give you a chance to buy options to take your equity investment to 50%. That means you will control a new semi-submersible with 15% of $4.5 million. If you are serious about going into offshore drilling, you won’t find a cheaper ticket.

Odegard got the approval for the investment from Norcem’s chief executive — and Norcem signed the agreement to subscribe for the stock and options. But when Siem approached Norcem to pay for its investment, the chief executive refused to complete the sale.

On hearing the news, Siem insisted on a meeting. In the meeting he told Norcem’s CEO: “You’re pulling the rug under my whole project.” The CEO responded: “You see, when you get drier behind the ears like me, then you will begin to understand that things are a little bit more complicated, so just accept that we are out of this business.”

In a pattern that would repeat itself many times in Siem’s career, he found another way.

Most of the Norwegians who had been vendors to Viking Offshore were stuck with a secured claim on the Haakon Magnus. They would not be able to collect if Chemical Bank sold it out of foreclosure for less than $22 million. Siem approached them to argue he was their only chance to collect the full sum they were owed. The catch was that they would have to ante up equity in Siem’s syndicate. Though they were reluctant, Siem believes that they were persuaded by his passion:

My enthusiasm and drive for this project, and conviction that this was the right thing to do, was contagious on other people around me. They would see that, “Hey, we don’t know this as well, but we can see that Kristian is in there and he’s absolutely determined. He’s putting all his money into it. He’s going for it and we want to be a part of it,” so that, I think, was a factor also, in raising the capital necessary.

These investors would ultimately end up more than tripling their money on this investment when Siem sold the rig for $32.5 million to his former boss Olsen.

A mistake

In 1981, Siem found the deal that would be key to his foray into the shipping world. The Diamond M Dragon, a drill ship, was for sale. The ship had not been well-maintained and Siem was able to buy it for $32 million.

Though the Diamond M Dragon was a deal too good to pass up, Siem still believed that the offshore drilling market was about to crash. In 1982, while the drill ship was under contract to Phillips, he started to consider his options. He says that, in hindsight, he should have sold it, and believes that he could have sold it for as much as $70 million in cash.

Instead, he merged the Diamond M Dragon into Common Brothers Plc., a British shipping company founded in Newcastle, England in 1892, and listed on the London Stock Exchange. Common Brothers had a storied history. It had been one of the original shipping companies in India during the time of the British Raj, when British shipping was at its peak. Siem says that he was mesmerized by such a fantastic, old-line British shipping company. He saw that he could get control by merging the drill ship into Common Brothers for stock. In so doing, he would become the largest shareholder by far in Common Brothers’ stock.

Emblematic of the company’s problems, the company’s main asset — its tanker ships — were poorly run, and losing money. When Siem went on board a tanker to inspect it, he found that only the officer’s bar had been maintained:

We felt we got a good price for the drill ship and they felt they got a good price for the shares. I don’t remember what the share price was now, but it was certainly not worth it. In those days the officers on board the Common Brothers vessels met for drinks every evening in a bar. It was really shiny. The rest of the ship was falling apart. I think that was very symptomatic of all the assets and the care.

Common Brothers was a mess that would take Siem four years to clean up. Nevertheless, it led him into the shipping industry, in which he would ultimately enjoy great success.

Siem’s source of permanent capital, whether his own money or that of Siem Industries, is dedicated for the long term and allows him to invest for the long term. Moreover, Siem’s personality has allowed him to do deals that others would have had to walk away from. He can think differently about an investment than another investor, closer in style to a typical fund manager, who has two tasks: (1) to produce returns and (2) keep the investor base happy. Siem believes this long time-horizon has been central to his success:

Industry, by nature, is long term, and the fund management business, by nature, is short term. Financial investors come in and out: They can push a button any day and get out. The principal industrial investors don’t have that luxury. They have to think for the long term. I believe indeed the success of industry is that you always think long term, so even if incidents like mergers or takeovers cause you to be out in the shorter term, you take the long-term decision as if you were to be the owner forever. That is healthy for the industry, and therefore also for its shareholders. I think that has been the success of our operation.

Excerpted from Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors, by Allen Benello, Michael van Biema, and Tobias Carlisle. (John Wiley & Sons, Inc.)

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