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Future for the A & B Shares?


thefatbaboon

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Apologies if this has been discussed before…

 

Has WB ever mentioned whether there is an intention to normalize votes between the two classes at some point?  All of his estate is getting converted in to Bs prior to gift/sale - that gets rid of about 40% of the A float.  But that leaves about 500,000 remaining Class As…. enough that they would have a dominating vote.  No one cares about these kinds of things while Buffett is around but it might become important down the road.

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Why a non-issue?  In the absence of a controlling shareholder (Buffett) wouldn't the A shares start to command a material premium?

 

Maybe, but then people would buy the B shares and the premium would fall again. It's hard to see the As trading at a permament & material premium above the Bs, unless there was some odd situation around control of the company. And even that I think would be temporary. Buffett himself said a 1% premium would make the Bs more attractive. Granted he said this a long time ago.

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I think it's mainly a non-issue because it will be near impossible for any entity to get a controlling position in BRK in the future.  The A-shares are the way to do it, but they have very low volume that will only shrink as they can only be converted in one direction.  As BRK's market cap continues to grow, an entity seeking control would need $70 billion plus worth of illiquid A-shares to take control the "cheap way".  The board owns 33,000 A-shares outside of Buffett (+undisclosed Munger children).  BRK may also repurchase A-shares in blocks further reducing outstanding shares and potential volumes.  Another part-stock deal like BNI would further increase the number of B-shares, etc etc…

 

Berkshire will be a Trillion dollar market cap company at some point in the not too distant future.  Difficult to take over, even with a potent share class.  And with a strong board led by lead director Bill Gates who will still control one hell of a lot of votes...

 

You don't see Icahn getting a seat on the Apple board.  Hell, Sardar can't even get on the CBRL board with 20%.

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I think it's mainly a non-issue because it will be near impossible for any entity to get a controlling position in BRK in the future.  The A-shares are the way to do it, but they have very low volume that will only shrink as they can only be converted in one direction.  As BRK's market cap continues to grow, an entity seeking control would need $70 billion plus worth of illiquid A-shares to take control the "cheap way".  The board owns 33,000 A-shares outside of Buffett (+undisclosed Munger children).  BRK may also repurchase A-shares in blocks further reducing outstanding shares and potential volumes.  Another part-stock deal like BNI would further increase the number of B-shares, etc etc

 

Berkshire will be a Trillion dollar market cap company at some point in the not too distant future.  Difficult to take over, even with a potent share class.  And with a strong board led by lead director Bill Gates who will still control one hell of a lot of votes...

 

You don't see Icahn getting a seat on the Apple board.  Hell, Sardar can't even get on the CBRL board with 20%.

 

I agree it's mostly a non-issue, but control actually gets less costly as the number of A shares shrinks, up to a certain point.

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I think of it the same way as you guys.    I've always been a b share buyer as I prefer the little discount over the votes.  Was just wondering if I was maybe being stupid and there was something I hadn't thought of.

 

The B shares have a tailwind to trade at a premium to the A shares because they have more liquidity, but the provision whereby a A share can be converted to 1500 B shares opposes that. When the price of 1500 B shares rises above the value of the A share, the difference can be arbitraged by buying an A share while simultaneously shorting 1500 B shares.  Then the A share can be converted into 1500 B shares to cover the short position a few days later.

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Guest longinvestor

Why a non-issue?  In the absence of a controlling shareholder (Buffett) wouldn't the A shares start to command a material premium?

 

Wouldn't the Buffet Foundations be the controlling shareholders in the future?

 

For no more than 10 years after WEB's estate is settled.They have to spend it, not hold on the shares.

 

 

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Perhaps.  But I think there are a couple good points raised against the As votes being significant.

 

1.)  The Estate/Foundation will have control until 10 years after WEBs passing.  If the estate finishes 14 years from today then it is likely that BRK is 4 times the size of today (10% cagr). Ie greater that $1trn

 

2.) Over this 14 year period there is likely to be dilution from purchases & and the occasional arbitrageur swapping As.

 

By the time the foundation winds down the As will probably represent a voting interest between 30% and 40%.  Furthermore the illiquidity compared to the Bs will be worse than today.  It's true that a deep pocketed "Helper" with $20b-40b and a lot of patience might use the As to get 3%-6% of the vote.  But I don't think the As could serve as a means to semi-control (30% votes), which would require two hundred billions and many years to get that many As.

 

Even if one looks far out into the future I find it difficult to see how the voting privileges of the As are going to be significant.

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Guest longinvestor

After WEB is gone there is nothing to stop an Icahn-type character from putting BRK in play. Sadly, many of the "Helpers" Warren has been denigrating over the years would love to rip BRK to pieces.  I prefer the A's because the voting rights may be worth something some day.

The 1.2x book GTC buy order with the perpetual cash cushion over $20 B is certain to come into play. Plus what's the likelihood of the next CEO, Todd, Ted, the Division Chiefs not going WEB's way to becoming the world's richest people on earth  via concentrating their networth in BRK? Slim to zero chance that BRK will be put into play as you state it.

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I have some concern that BRK has been successful because of WEB - not the culture or business model that WEB has implemented. If the stock price languishes, shareholders may be wishing for - not fearing - a tender offer for controlling interest. Why not pay the extra 1% to reap the potential 10 or 20% premium in the future? Note: this only applies if you are buying with the intention of holding shares for the long term.

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Perhaps.  But I think there are a couple good points raised against the As votes being significant.

 

1.)  The Estate/Foundation will have control until 10 years after WEBs passing.  If the estate finishes 14 years from today then it is likely that BRK is 4 times the size of today (10% cagr). Ie greater that $1trn

 

2.) Over this 14 year period there is likely to be dilution from purchases & and the occasional arbitrageur swapping As.

 

By the time the foundation winds down the As will probably represent a voting interest between 30% and 40%.  Furthermore the illiquidity compared to the Bs will be worse than today.  It's true that a deep pocketed "Helper" with $20b-40b and a lot of patience might use the As to get 3%-6% of the vote.  But I don't think the As could serve as a means to semi-control (30% votes), which would require two hundred billions and many years to get that many As.

 

Even if one looks far out into the future I find it difficult to see how the voting privileges of the As are going to be significant.

 

To get the As down to 40% of the vote you'd need approx 375k A shares on top of WEB's holdings to convert to B (assuming no repurchases of stock by the company). That's a lot of shares. I think much more likely the As continue to be well north of 50% of the vote.

 

I think the illiquidity would be the problem, but I don't think the cost is prohibitive. To get 6% of the vote, assuming WEB's 336k shares become B shares and nothing else happens, would only cost $7 bn at today's prices. And that gets CHEAPER as the A shares convert to B shares, up to a certain point when you don't have enough A shares to get the % of votes you want.

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