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David Sokol, considered a possible successor to Warren Buffett at Berkshire Hathaway Inc. (BRKA, BRKB), identified chemicals maker Lubrizol Corp. (LZ) as a potential acquisition and took the lead in early negotiations to buy the company, according to a regulatory filing late Friday that detailed how last week's $9 billion deal came about.
It was Sokol, a Berkshire executive, who plucked Lubrizol from a list of 18 chemical companies that bankers at Citigroup Global Markets had compiled in December 2010 as possible acquisitions at Sokol's request, according to the filing.
Sokol, chairman of Berkshire subsidiary MidAmerican Energy Holdings Inc. and chief of unit NetJets Inc., met with Lubrizol Chief Executive James Hambrick in January to discuss the corporate culture at the two companies, and told him a Berkshire takeover offer would be contingent on Hambrick's agreeing to stay on as CEO.
It was after Hambrick and his board of directors had agreed to move forward with takeover talks that Buffett, Berkshire's chairman and chief executive, took the lead, the filing says. Those talks culminated in the announcement March 14 of Berkshire's plan to acquire Lubrizol for $9 billion in cash.
Sokol's early involvement in the deal is further evidence that he has become an important lieutenant for Buffett in recent years, and may give more ammunition to followers of Berkshire who consider him the frontrunner to eventually replace Buffett as Berkshire's CEO. Buffett had already tapped Sokol to turn around Berkshire's fractional-jet business, NetJets, and sent him to China to meet with executives at battery-maker BYD before investing in that company.
Back in 2008, Sokol also identified and helped negotiate another major deal for Berkshire: the takeover of Baltimore utility Constellation Energy Group Inc. (CEG). The merger ultimately fell apart, but Berkshire walked away with more than $900 million in investment gains from buying preferred shares in the company and a $175 million break-up fee from the scuttled deal.
The filing said that Sokol meets regularly with a variety of investment banking firms, including Citigroup, "to discuss capital-raising and transaction ideas." Late last year, Sokol asked Citigroup for "more information regarding possible transactions in several industries, including the chemical industry," the filing said.
The regulatory document, a preliminary proxy statement for Lubrizol shareholders who must vote to approve the deal, showed that Buffett took a firm line with Lubrizol's board once he had given them his offer to buy the company for $135 a share in February.
In early March, Lubrizol's board of directors indicated through their financial adviser, Evercore Partners, that they wanted Berkshire to pay $140 per share. Buffett didn't budge on his $135-per-share offer, which reflected an 18% premium to the stock's all-time high price.
Evercore warned Lubrizol that Berkshire might withdraw its offer if the company sought out other potential buyers for a higher bid, and indicated it was unlikely others would pay more for the business.
Buffett has famously said that he doesn't participate in auctions when negotiating to buy a company. Lubrizol's financial advisers warned the board about Buffett's dislike of competing bidders at more than one meeting, according to the proxy.
Berkshire's legal team later stood firm on the size of a break-up fee that Berkshire would earn if Lubrizol later accepted a higher offer. Despite efforts by the Lubrizol team to push Berkshire's negotiators to lower their demand for a $200 million fee, the fee never changed. Berkshire also rejected a so-called "go-shop" period that would have given Lubrizol 60 days to try to find a better offer.
All the while, the Lubrizol board was weighing the takeover against an earlier plan it had developed to make a takeover offer of its own. The target isn't named in the proxy.
Berkshire's acquisition of Lubrizol is expected to close in the third quarter and requires approval from shareholders of the chemicals company. Lubrizol is aiming to earn $13.50 per share in 2012, versus earnings of $10.64 per share in 2010.
Shares of Lubrizol closed Friday up 5 cents to $133.75.
-By Erik Holm, Dow Jones Newswires; 212-416-2892; email@example.com