COMPUTER NETWORKING: {PRIVATE}

1 555 CALIFORNIA STREET SAN FRANCISCO 94104 (415) 781-9700 February 20, 1997 COMPUTER networking : { private }An Open Letter to Warren Buffett Re: Cisco SystemsPaul Johnson, CFA (212) 407-0415 Paul Silverstein (212) 407-0440Mr. Warren BuffettChairman of the Board andChief Executive OfficerBerkshire Hathaway Kiewit PlazaOmaha, Nebraska 68131 Dear Warren:If You Think Coke Is A Good Investment ..ROBERTSON, STEPHENS & COMPANY1 Paul Johnson, CFAR obertson, Stephens & Company590 Madison AvenueNew York, NY 10022 February 20, 1997 Dear Mr. Buffett:We have been ardent students and admirers of your investment career. Amongother tenets of your investment discipline, we share the following: Long-term investment horizons; A focus on operating business fundamentals and not stock marketsentiment; Fundamental analysis that focuses on neither value nor growth rubrics, which as you have so presciently noted, in and ofthemselves are devoid of any utility as investment guideposts butrather, on profitable growth, , the deployment of large amounts ofincremental capital at very high rates of return; A predilection for companies that have defensible franchises, withdeep moats and high walls, sound business strategies, a highdegree of customer control and some level of monopolistic pricingpower.

2 A rigorous valuation recognize that, having had some success on your own in identifying greatbusinesses and acquiring interests therein when your benefactor, Mr. Market attimes a somewhat capricious fellow has felt out of sorts, you have never hadmuch use for securities analysts. Nevertheless, in the interest of market efficiency,we feel obliged to call your attention to an industry and a specific company withinthat industry that you may have overlooked or never occasioned upon in yourinvestment journeys. This investment opportunity lies in a pond that, we believe,you have traditionally avoided in the mistaken belief that you lacked the requisiterod and tackle and that the fishing was too speculative. We assure you, however,we believe that the fish in this pond are not only well worth your time, but also wellwithin your should note that we were also inspired to write to you by one of our colleaguesat a competing firm across the Street, who wrote to you last year to outline aninvestment case for Kellogg If you found Kellogg to be impressive(even if you didn t), and given that capital is a scarce resource (albeit perhaps notas scarce for you as for the rest of us), you should continue reading.

3 We believethat you will find the fish to be much fatter and the fishing to be much easier in industry within which this investment opportunity lies did not exist ten yearsago and, as evidenced by its continuing phenomenal growth rate, appears to be farfrom its prime. This industry has generated and continues to generate 1 We refer to Kellogg Company: An Open Letter to Warren Buffett , CS First Boston research note dated July 11, 1996, prepared byMichael J. Mauboussin, Managing Director, CS First Boston. ROBERTSON, STEPHENS & COMPANY2extraordinary and sustained returns on invested capital and growth rates of asimilar magnitude and duration. It not only has managed to internally self-financeout of operating cash flow an almost fivefold increase in invested capital over thepast three years, but it has generated a considerable and growing amount ofexcess cash over and above what is required to fund such growth.

4 Generating andsustaining this profitability and growth, moreover, the industry enjoys self-generating demand, formidable barriers to entry and ongoing consolidation. Thosecompanies that gained first mover advantage in one or more segments of thisindustry have continued to prosper and to gain market share, with returns andgrowth fueled by the booming demand and protected by the barriers to entry , this industry is the industry that we follow, COMPUTER ! Do not throw out this letter! We recognize that you perceive most, if notall, technology companies to lie outside your circle of competence; happily, webelieve you are mistaken! If you will read to the end of this letter, we believe thatyou will see that the economic fundamentals of this industry and its companies arewell within your grasp and, contrary to popular belief, do not require a incomputer science or electrical engineering (or even a Columbia MBA for thatmatter).

5 We emphasize you will see as opposed to we will show you for, of course, wedo not expect you to rely on the research of a securities analyst. The raw data andreadily observable trends speak for themselves and require little, if any, alluded to above, the COMPUTER networking industry, in general, and a host ofcomputer networking companies, in particular, are fundamentally phenomenalbusinesses. We call your attention to one networking company in particular: CiscoSystems (CSCO $64-7/8 Buy).To give you an idea of just how phenomenal the operating fundamentals of boththe networking industry, in general, and Cisco, in particular, are we thought TheCoca Cola Company, a company with which we believe you are familiar, wouldprovide a reasonable yardstick.

6 In making our specific investment case for Cisco,relative to Coke, we will address the fundamental tenets of your investmentphilosophy set forth in the two recent biographies of your investment career, RogerLowenstein s Buffett and Robert Hagstrom s The Warren Buffett offers the following guide gleaned from your letters to shareholders,other writings and comments over the years to your investment discipline: Pay no attention to macroeconomic trends or forecasts or topeople s predictions about the future course of stock prices. Focuson long-term business value on the size of coupons down the road. Stick to stocks within one s circle of competence. Look for managers who treat the shareholders capital with owner-like care and thoughtfulness. Study prospects and their competitors in great detail.

7 Look at rawdata, not analysts , STEPHENS & COMPANY3 Regarding the last of these investment guideposts, as noted above, you need notrely solely on our analysis of Cisco s long-term business value. In an effort tofacilitate your analysis, we have set forth the raw data below. We believe that youwill find this data presents a rather compelling picture of Cisco s prospects for long-term value did our colleague Mr. Mauboussin, a Managing Director at CS First Boston, wewill treat the other basic tenets of your investment discipline noted above in thecontext of Mr. Hagstrom s guide to your investment philosophy, which he sets forthin terms of business, financial, management and market and Financial TenetsConsistent Operating History/Attractive ReturnsCoca Cola s operating performance and market position are enviable.

8 Thecompany has created a seemingly unassailable franchise. Having captured mind-share, it enjoys what you refer to as deep moats and high walls. Thesecompetitive barriers have enabled Coca-Cola historically to generate very attractiveoperating returns from a rather large and growing base of invested On Invested Capital (ROIC)As you noted in your Berkshire Hathaway 1992 Annual Report to Shareholders: Leaving the question of price aside, the best business to own is onethat over an extended period can employ large amounts ofincremental capital at very high rates of return. The worst businessto own is one that must, or will, do the opposite that is, consistentlyemploy ever-greater amounts of capital at very low rates of , the first type of business is very hard to find.

9 Indeed, it s not easy to find companies such as Coke that can apply large amountsof capital over extended periods of time at steadily wide positive spreads. Thatbeing said, set forth below is a comparison of the return on invested capital (ROIC)and its constituent components, net operating profit after tax (NOPAT) andinvested capital, for both Coke and Cisco for (1) each of the quarterly periodsspanning calendar Q1 1994 through Q4 1996, (2) the trailing four quarter periodending in each of the quarterly periods spanning calendar Q1 1994 through Q41996 and (3) each of their last six respective fiscal years spanning calendar 1991through use ROIC, as defined above, since we believe it to be the best metric forassessing a business true profitability.

10 Cash, in the form of capital, is the lifebloodof every business, public or private , irrespective of size or nature. As such, it isboth a scarce and an essential resource and the one incontrovertible commondenominator shared by Cisco and Coke and, for that matter, by every businessenterprise. 2 Given that Coke has not yet finalized and published its December 31, 1996 balance sheet, for purposes of calculating Coke s ROICfor each of calendar Q4 1996 and the four-trailing quarter period ending in Q4 1996, we have made the fairly conservativeassumption (taking into account and not withstanding Coke s sale of its 49% interest in Coca-Cola & Schweppes Beverages Ltd.)that Coke did not invest any additional net capital in its business following the end of calendar Q3 1996 , that invested capital atthe end of December 31, 1996, remained at the September 30, 1996 level.