Buffett/Berkshire - general news

[TREVNI]

By my math BRK is paying 0.89x float for Y. Not bad! And considering the deal doesn't close until the end of the year it's probably a price/book of about 1.15x. 

[sleepydragon]

Nice deal:

- Brk ends up with more cash after the deal then before the deal, if Buffett liquidate the bond portfolio

- got a great ceo that understands insurance 

- and of course a good business that he understands 

 

[Munger_Disciple]

3 hours ago, wabuffo said:

What's the right way to think about it?

 

From the seller POV.

 

The sellers we're talking about are smart & and as they look out, they see falling bond prices (and equity values).  Not much fun when you are holding a large bond (and to some degree equity) portfolio.

 

Bill

 

+1 

Excellent point Bill! It is quite possible that Y's Q1 results show losses (potentially large depending on their duration. I haven't looked at Y's most recent 10-K so I don't know) in their bond portfolio given the rapid rise in interest rates this year. It also explains why Berkshire is not asking for a break-up fee if Y finds another suitor. 

Ajit & Warren are as shrewd as they come and they think it is quite unlikely that Y will attract another suitor in 25 days which incidentally coincides with Q1 earnings season. 

Edited March 21, 2022 by Munger_Disciple

[scorpioncapital]

I'm surprised he didn't pick up AIG. A very large float. Mostly bonds. Derivative book completely clean now. Finally back to firing on all cylinders. Very streamlined. Maybe he's waiting for the life biz separation if he's gonna pounce on the p&c portion.

 

Edited March 21, 2022 by scorpioncapital

[Munger_Disciple]

1 hour ago, Munger_Disciple said:

 

+1 

Excellent point Bill! It is quite possible that Y's Q1 results show losses (potentially large depending on their duration. I haven't looked at Y's most recent 10-K so I don't know) in their bond portfolio given the rapid rise in interest rates this year. It also explains why Berkshire is not asking for a break-up fee if Y finds another suitor. 

Ajit & Warren are as shrewd as they come and they think it is quite unlikely that Y will attract another suitor in 25 days which incidentally coincides with Q1 earnings season. 

 

So I took at a quick look at Y's 2021 10-K. It looks like they have $15.7 B  fixed income securities out of which $5.5B have maturities exceeding 5 years and $3.7B have maturities between 1 and 5 years. Y has significant duration exposure which implies significant mark-to-market losses on FI portfolio in Q1. 

 

I love this deal! Berkshire gets float and great insurance executive talent. Relatively cheap. Plus Buffett will sell long dated bonds and uses the losses from FI portfolio to offset capital gains from elsewhere in Berkshire portfolio. And Y's large FI portfolio is not attractive to others so the probability of a competing offer is very low.  

Edited March 21, 2022 by Munger_Disciple

[Munger_Disciple]

Interesting details: https://www.bloomberg.com/news/articles/2022-03-21/buffett-thumbs-nose-at-goldman-bankers-with-quirky-deal-price

 

Quote

Berkshire had offered to pay $850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: An announced purchase price that subtracts roughly $27 million for Goldman -- calling attention to Buffett’s stand.

 

Edited March 22, 2022 by Munger_Disciple

[Xerxes]

So he is really swapping short-term duration money with [med/long-term duration money + management].  

question ?

 

i realize BRK is net buyer of its stock and he is no mood to issue stock to fund any purchase these days, …. but if he were to issue stock (b/c the seller hypothetically wanted a piece or be tax-efficient) and then buyback the said amount with BRK cash, are there major friction for BRK that would work against doing that ? 

[james22]

It will be interesting to see if the $16.1 billion fixed income book is immediately liquidated and added to Berkshire’s cash position when the transaction closes. If so, Berkshire will actually end up with more cash after the acquisition given that the deal is for $11.9 billion.

 

https://rationalreflections.substack.com/p/what-does-buffett-see-in-alleghany?token=eyJ1c2VyX2lkIjoxNzU0NjIxMSwicG9zdF9pZCI6NTA3NzQwOTUsIl8iOiJuQ3FmaSIsImlhdCI6MTY0NzkwODQyMiwiZXhwIjoxNjQ3OTEyMDIyLCJpc3MiOiJwdWItMTA5NzgzIiwic3ViIjoicG9zdC1yZWFjdGlvbiJ9.KMhRQoEK4bVVEiak-ghMa8duyB259HWYl5at8_f51aQ&s=r

[gfp]

Bloomberg has an article shedding some light on the odd 848.02 deal price:

-----------------------------------------------------------------------------

 

Warren Buffett is telegraphing his disdain for Wall Street bankers with an oddball price on his latest multibillion-dollar takeover.

The $848.02 for every share that Alleghany Corp. stockholders get from Berkshire Hathaway Inc. is the result of Buffett balking at the banking fee being set aside by the target company -- in this case for Goldman Sachs Group Inc., which is advising the insurer. 

 

Berkshire had offered to pay $850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: An announced purchase price that subtracts roughly $27 million for Goldman -- calling attention to Buffett’s stand.

The 91-year-old has historically expressed disdain for investment bankers, calling them among the expensive “money-shufflers” who “clamor to be fed” in his annual letter released in 2015. When he was a shareholder and director of Gillette Co., he pushed unsuccessfully in 1996 to slash such fees to Duracell International Inc.’s bankers as part of Gillette’s acquisition of the battery company.

Representatives for Goldman and Alleghany declined to comment. Buffett’s assistant didn’t immediately return a message seeking comment. 

 

 

The transaction is Berkshire’s largest since 2016, according to data compiled by Bloomberg. While deal prices typically reflect the back-and-forth between buyers and sellers, it gets smoothed over before the deal is struck. Most announcements are priced to avoid clunky numbers after both sides agree on a plan for how advisors are paid. A regulatory filing notes that the price would have been $850 per share but for the roughly $27 million fee paid to Goldman.

 

The Oracle of Omaha, known for his witty business aphorisms, rarely uses an investment bank with his deals, instead relying on Berkshire Vice Chairman Charlie Munger’s previous law firm, Munger, Tolles & Olson, to advise on acquisitions.

There have been exceptions. Byron Trott, a former Goldman Sachs Group Inc. banker who helped Buffett strike a deal to buy food distribution business McLane from Walmart Inc., was one of the rare bankers who won grudging respect from Buffett.

“He understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to say this – earns his fee,” Buffett said in his letter released in 2004.

---------------------------------------------

 

From the Alleghany merger proxy:

"(a) Each Share issued and outstanding immediately before the Effective Time (other than any Shares to be cancelled pursuant to Section 2.1(b) and any Dissenting Shares) will be cancelled and extinguished and be converted into the right to receive $848.02 in cash, representing $850.00 per Share less the financial advisory fee due to the Financial Advisor in connection with the Merger, payable to the holder of such Share, without interest"

Edited March 22, 2022 by gfp

[nwoodman]

Morningstar’s Greg Warren on the Alleghany deal

 

“We expect to increase our fair value estimate for Berkshire Hathaway (BRK.B)
by 3%-5% following news that the wide-moat firm has agreed to acquire the
outstanding equity of Alleghany, a property/casualty insurer with reinsurance
and specialty insurance lines, for $11.6 billion. While the deal seems pricey at
first glance, with Berkshire offering $848.02 per share in cash for Alleghany--a
29% premium to Alleghany's average stock price over the last 30 days (and a
16% premium to the firm's 52-week high closing price)-the acquisition price
works out to a multiple of 1.26 times Alleghany's book value per share at the
end of 2021. Berkshire has been buying back its own common stock for an
average of 1.37 times prior quarter book value per share the past year, so a
premium that lifts the deal price for Alleghany up to 1.26 times book seems
reasonable to us from a price perspective.

That said, we'll have to see how much value Berkshire can extract from
Alleghany's insurance operations, noting that insurance deals can be tricky as
the acquirer is assuming potential future claims established by the acquired
firm's past underwriting. While Alleghany's inability to generate excess returns
on a consistent basis could be a sign of underwriting weakness, we'd note
that the firm's reinsurance arm (which can be hit with large catastrophe losses
at any given time) have had a greater influence on overall results the past
decade. We'll also have to see how Berkshire handles the investment portfolio
at Alleghany, which has been dedicated more to bonds (80%-85% of holdings
the past two years) than equities (15%-20%), the complete opposite of
Berkshire's insurance operations (which has had 80%-85% invested in
equities). Should Berkshire avoid unforeseen underwriting issues and
reallocate the acquired investment portfolio to more lucrative options, this
could end up being a good deal (something Berkshire has struggled to find for
much of the past decade).”

[ValueMaven]

The deal isnt pricey at all imho.  Not sure what he is looking at?!

[ValueMaven]

Finally had a chance to read through the 10K and the 2021 annual letter.  This is a really nice acquisition for Berkshire on several fronts.

[HeadOfLeverage]

20 hours ago, ValueMaven said:

The deal isnt pricey at all imho.  Not sure what he is looking at?!

It's quite price to pay a premium to book for a business which generally haven't been able to reach 10%+ ROE imo. But with the assumption of moving the bonds into equities over time it looks like a bargain. Not sure how aggressive you should be there given how long BRK's cash pile has been laying around.  

[ValueMaven]

Everyone is saying how inactive Buffett has been and focusing on the cash pile.  I totally disagree.  Over the last 6 years you've had: PCP deal ($30B), D pipeline transaction ($10B), Buybacks ($50B), OXY loan/equity stake ($10B preferred plus another $7 in equity), and the pending Y transaction ($12B).  

[gfp]

Alleghany trading up above the deal price with a Barron's article speculating there could be other bidders.  Berkshire has been outbid on TransRe before, I suppose history could repeat itself.  

 

BTW - I thought I posted here last night but it is deleted.  Maybe because the site was down?

[ValueMaven]

I dont see another bidder coming through - although I could be wrong.  I think the rise in Y's price was driven by ETF flows.  Look at the trading pattern in the stock.  Also the size wasnt that large.  

[Munger_Disciple]

The possibility for a competing bid for Y is very low IMO. There are many reasons for this: (1) Y has a longer duration bond portfolio that will be marked to market when it announces Q1 results and the bond portfolio losses will not look pretty. So effectively Berkshire is likely paying slightly higher price to Q1-22 book than the reported 1.26 number based on Q4-21 book value,  (2) Historically the offered price to book for Y is at the very high end of its market valuation over the last 10 years, (3) The reality is that Y is a better business as a part of Berkshire than as a stand-alone business. It has been a low ROE business for a long time as they were forced to hold lots of bonds (with very low coupons) to match their insurance liabilities. Once  Y becomes part of the mother ship, they wouldn't have to do it and finally (3) Ajit & Warren are as smart as they come. They know all this and that's why there is no break-up fee. 

 

IMO this is a rare deal that is good for both buyers and sellers. Both sides are very smart so that's what we should expect. 

Edited March 27, 2022 by Munger_Disciple

[gfp]

So Berkshire, and it looks like Warren from the filing, bought over 11% of HPQ.  Having not looked at HPQ since sometime around the Compaq merger I was surprised to see how profitable they are and, of course, a large share repurchase program + dividend.  Obviously the pandemic created a boom for them.

 

Another surprising move from Buffett - he is willing to go above 10% more and more these days.

 

https://www.sec.gov/Archives/edgar/data/47217/000089924322014160/xslF345X03/doc4.xml

 

https://roic.ai/classic/HPQ

[sleepydragon]

19 minutes ago, gfp said:

So Berkshire, and it looks like Warren from the filing, bought over 11% of HPQ.  Having not looked at HPQ since sometime around the Compaq merger I was surprised to see how profitable they are and, of course, a large share repurchase program + dividend.  Obviously the pandemic created a boom for them.

 

Another surprising move from Buffett - he is willing to go above 10% more and more these days.

 

https://www.sec.gov/Archives/edgar/data/47217/000089924322014160/xslF345X03/doc4.xml

 

https://roic.ai/classic/HPQ

I forgot this company still exist..

Maybe they have some hidden assets, like billions of semi conductors in some warehouses??

[Gamecock-YT]

8 P/E. 2.7% divy, high ROIC, buying back lots of shares, large enough market cap to make a decent impact. Makes sense.

[Ulti]

Tracy Cool's 2nd annual letter

https://mcusercontent.com/64e1b84729b4195a49b750934/files/d432d3ac-e0b3-fa65-05f5-783b4ab1ca20/Kanbrick_Annual_Letter_2021_vFF.pdf

[Spekulatius]

On 4/7/2022 at 12:33 AM, Gamecock-YT said:

8 P/E. 2.7% divy, high ROIC, buying back lots of shares, large enough market cap to make a decent impact. Makes sense.

If you believe that HPQ business mean reverts, since the pandemic is over, then he bought $4B in pre tax income for a ~$40B EV, which is not that attractive, since HPQ isn’t growing.

 

High ROIC doesn’t really help if HOQ can’t invest incremental capital because it isn’t growing. Buffet must be seeing something else under the hood.

Edited April 9, 2022 by Spekulatius

[Minseok]

cant help but tie in my intel thesis here (for fun so take it or leave it)

Here is a growth thesis for HP (and it is similar for Dell): 

Intel processors post 2016  has not improved much and i think it has contributed to the slowing/lowering sales of PC's. I literally can do everything at satisfactory speed on a 2016 PC compared to a PC i buy today. WIth future processors being leaps and bounds better, and with a huge replacemnent cycle coming i think they will grow. The current laptop supply rate for schools for example is absymally low. Pat has mentioned that they also see material increase in the markets going forward according to their PC forecasts.

 

Also, just as apple is driving new mac sales with hardware acceleration on media/AI and other specialized functionality, with similar features for x86 road maps, and consider that there will always be afew PC users for every apple users, its an aspect of sales.

 

And when the FAANGs increase their capex (which they are doing now) they are buying racks from HP/DELL/Lenovo.

 

Also the purchase is eerily close to the recent plantornics deal. HP buys Plantronics in US$3.3 billion deal - Infobae. Perhaps a play on the remote working trend/metaverse pivot.

 

Havent run the numbers, but with such a low cost, above deals are probably all positives.

 

[gfp]

Preliminary merger proxy is out for the Alleghany deal (still not a done deal, go-shop period ends midnight on the 14th) - for those curious how it came together, search for "Background of the Merger" in the document (or actually it might automatically go right there with this link).  Buffett had dinner with Joe Brandon in NYC.  Wonder if he was back in Omaha by bedtime.

 

https://www.sec.gov/Archives/edgar/data/0000775368/000114036122013997/ny20003698x1_prem14a.htm#tBOM

Edited April 11, 2022 by gfp

[ValueMaven]