Dresser Industries

Dresser Industries was a major American multinational company, a titan in the world of energy services. For much of the 20th century, it supplied a vast array of technology, products, and services to the oil and gas industry, from drill bits and pumps to compressors and pipeline equipment. While it no longer exists as an independent entity, Dresser's story holds a special place in investment lore, primarily because of a shrewd investment made by Warren Buffett. This case study is a masterclass in identifying value in complex situations and structuring deals that offer both safety and significant upside. In 1998, Dresser merged with its rival, Halliburton, in a massive deal that created an energy services behemoth. However, this merger also came with a nasty surprise in the form of hidden liabilities, providing another critical lesson for investors about the importance of deep, thorough research.

For ordinary investors, the story of Dresser Industries is less about its industrial operations and more about the profound investment lessons it offers. It's a tale of two parts: a brilliant investment by a master and a cautionary tale about corporate mergers gone wrong.

In the late 1980s, the oil industry was in a slump. Oil prices were low, and companies like Dresser were deeply out of favor with Wall Street. This is precisely the kind of environment where a great value investor thrives. In 1989, Berkshire Hathaway invested $300 million in Dresser, but not by buying its common stock. Instead, Buffett chose a far more elegant instrument: convertible preferred stock. This specific security was a work of art from a value investing perspective:

• Downside Protection: The preferred shares came with a juicy 9.75% dividend yield. This meant Buffett received a strong, steady stream of cash, much like a bondholder. Even if Dresser's stock price stagnated, he was earning a fantastic return on his money. This fixed income-like feature created a solid floor for the investment.
• Upside Potential: The “convertible” feature was the masterstroke. It gave Buffett the right, but not the obligation, to swap his preferred shares for Dresser's common stock at a pre-set price. This is known as a conversion privilege. If, as Buffett anticipated, the oil industry recovered and Dresser's stock soared, he could exercise this option and participate fully in the upside.

This structure perfectly limited risk while leaving the potential for profit wide open. It was a classic Buffett-style investment, ensuring that even if he was wrong about the timing of the recovery, he would still do just fine.

In 1998, Dresser agreed to merge with Halliburton. For investors who held Dresser's common stock, the deal was a profitable exit. However, it also serves as a powerful cautionary tale about due diligence. Unbeknownst to many, Dresser carried a ticking time bomb on its books: immense asbestos liability inherited from a subsidiary it had previously owned. After the merger, Halliburton was suddenly on the hook for tens of thousands of asbestos-related claims, which ultimately cost the company billions of dollars, hammered its stock price, and forced a key subsidiary into bankruptcy. For Halliburton shareholders, the seemingly brilliant merger turned into a financial nightmare.

The rise and fall of Dresser Industries offers several timeless lessons for anyone looking to build wealth through investing.

• Look for Hybrid Securities: Don't just think in terms of stocks and bonds. Instruments like convertible preferred shares can offer the best of both worlds—income security and growth potential. They are fantastic tools for conservative investors looking for an edge.
• Be a Contrarian: The best time to invest is often when an industry is plagued by pessimism. Buffett's investment in an out-of-favor oil services company during a downturn is a classic example of buying fear when others are panicking.
• Dig Deeper Than the Numbers: A company's true intrinsic value isn't always reflected in its financial statements. You must investigate its history, past acquisitions, and potential legal risks. The Dresser-Halliburton merger is a stark reminder that hidden liabilities can destroy value overnight.