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Has he found his elephant?


nwoodman
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Guest longinvestor

"Was this deal the work of one of the T's?"

 

Todd Combs

 

http://www.cnbc.com/2015/08/10/warren-buffett-precision-deal-very-high-multiple.html

 

 

Cheers!  :)

http://www.bloomberg.com/news/articles/2015-08-10/buffett-s-path-to-37-2-billion-deal-shows-combs-s-growing-role?cmpid=yhoo

 

He can call any CEO in the world and get time. Has a great perch.

 

 

 

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$37 B anyone? So, if you are Todd, a virgin when it comes to elephant deals, I'm trying to imagine the palpitations, sickness-in-the-stomach, cold sweat, heavy breathing, loss of appetite etc. when his boss tells him "If you like it so much, why don't you buy the whole darned company. We got the money". Reading 500 pages a day is all well and good. I don't do that but think I could. But this is *$#%ing different. I'll bet you, it will take a while for Todd to digest this one down.

 

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$37 B anyone? So, if you are Todd, a virgin when it comes to elephant deals, I'm trying to imagine the palpitations, sickness-in-the-stomach, cold sweat, heavy breathing, loss of appetite etc. when his boss tells him "If you like it so much, why don't you buy the whole darned company. We got the money". Reading 500 pages a day is all well and good. I don't do that but think I could. But this is *$#%ing different. I'll bet you, it will take a while for Todd to digest this one down.

 

I think he is fine with it. I feel like T&T have that "would I buy the whole company" mentality.

 

How motivating is this to Ted? Wasnt the speculation always about DVA? I think he gets an elephant in due time as well.

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  • 2 weeks later...

Can Berkshire buy stock from open market when they have offer pending?

 

I don't know, but I also question why they'd want to.

 

Instead, they wind up with more assets on the balance sheet if you use the same amount of cash to add to existing equity positions.

 

A buyback is a return of capital -- it's not as good as adding to their positions that earn a return.

 

That is... if you want a fortress.  If you like the idea of growing the many little rivers that feed the mighty Amazon.

 

IMO.

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I think valueinvesting101 is asking whether they can buy PCP stock on open market while they have offer for it pending.

 

I think they can up to poison pill level (if any), but I'm not 100% sure.

 

In some other countries, this is not allowed.

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Can Berkshire buy stock from open market when they have offer pending?

 

I don't know, but I also question why they'd want to.

 

Instead, they wind up with more assets on the balance sheet if you use the same amount of cash to add to existing equity positions.

 

A buyback is a return of capital -- it's not as good as adding to their positions that earn a return.

 

That is... if you want a fortress.  If you like the idea of growing the many little rivers that feed the mighty Amazon.

 

IMO.

 

Buffett is all about increasing intrinsic value, not expanding empire.  If he could buy a significant amount of his existing businesses at a price cheaper than buying a new business he would do it.  I would guess he'd rather put $37 billion in to BRK share buybacks than PCP but it is unlikely he could repurchase that amount of shares.

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Actually Buffet is a bit of a hoarder. He likes to hoard companies. He just does it at good prices not at any cost like other CEOs. The ironic part is that because he does it at good prices he can hoard more than the others. But between buying back stock and buying another company where the returns are similar it's clear that he would rather buy the other company.

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Can Berkshire buy stock from open market when they have offer pending?

 

I don't know, but I also question why they'd want to.

 

Instead, they wind up with more assets on the balance sheet if you use the same amount of cash to add to existing equity positions.

 

A buyback is a return of capital -- it's not as good as adding to their positions that earn a return.

 

That is... if you want a fortress.  If you like the idea of growing the many little rivers that feed the mighty Amazon.

 

IMO.

 

Buffett is all about increasing intrinsic value, not expanding empire.  If he could buy a significant amount of his existing businesses at a price cheaper than buying a new business he would do it.  I would guess he'd rather put $37 billion in to BRK share buybacks than PCP but it is unlikely he could repurchase that amount of shares.

 

The future of the entire enterprise is more secure if you have more varied streams of income, and put together those streams of income are bigger than before.

 

You can never attain the same ever-increasing level of safety by buying your own company stock.

 

Just like paying dividends doesn't make your earnings capacity greater...

Just like paying dividends doesn't make your balance sheet stronger...

 

Buybacks fortify the business in the same way as a paid dividend -- exactly zero.

 

There's a bigger issue here than "empire building".  How about ever-more-secure empire?

 

Build it stronger.  Make it even harder to break.

 

I'd rather have 2 separate income streams within Berkshire than just 1.  I'd rather have 3 than 2, I'd rather have 51 than 50, I'd rather have 75 than 74.  Etc... etc....

 

 

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I keep thinking about that last banking crisis.  What if each bank never paid dividends (nor bought back shares) and instead retained those earnings to purchase more diverse income streams (not more banks, but completely separate industries)?  Would they have needed bailout money? 

 

I wonder how much money was poured into dividends and buybacks at BAC over the prior 20 years leading up to the crisis.

 

Anyways, different topic from this thread. 

 

Berkshire has something great going on from the nearly indestructible nature of it -- those independent businesses reinforce the safety of each other.  Businesses that return capital to shareholders can never reach their maximum potential level of safety -- by definition of having returned the excess capital.  IMO.

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Ericoploy, I don't think you're diverging from the issue at hand and I think you're pretty spot on.

 

One thing that I think you left out is Berkshire's ability to think independently. This also relates to your comments about the financial crisis. Most companies follow conventional thinking - the "smart thinking". Optimized capital structure, strategic capital allocation, etc. At BRK they don't do that they don't do that they're happy to have an inefficient capital structure (lots of cash, little debt) to protect the businesses. The capital allocation is opportunistic as opposed to targeted. And they're always ready to give up a bit of return for a lot of safety - hold treasuries even is you get a 30 bpts less in yield.

 

Most other cos and especially the banks went the completely the other way. Highly optimized capital structure - lots of leverage, VIEs, buybacks, the lot. They held mortgage bonds rather than the mortgages they actually underwrote to get a couple of extra bps, AAA rated structured finance vs treasuries for 30 extra bps. Anyway, the list goes on and on.

 

This is also an important part of BRK. They are greedy but not so greedy that they risk the company for a few extra bucks. The ironic part is that this sub optimal and opportunistic approach to capital allocation turns out to be more profitable than the efficient approach.

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I keep thinking about that last banking crisis.  What if each bank never paid dividends (nor bought back shares) and instead retained those earnings to purchase more diverse income streams (not more banks, but completely separate industries)?  Would they have needed bailout money? 

 

I think Glass Steagall preempts that.  For a commercial entity and a banking entity to be under the same roof potentially gives that commercial entity a very strong financing advantage, which, in a guaranteed deposit world, is arguably derived at the public's cost.  With the right management, it's not a bad thing, but regulation is never intended for the well behaved.  The closest banks got to own a legal "diverse income stream" is owning the credit card processors, Elavon in the case of US Bank, Vantiv in the case of Fifth Third, and they haven't been bad things to have during the tough times.  But such is life with these heavily regulated entities.

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I keep thinking about that last banking crisis.  What if each bank never paid dividends (nor bought back shares) and instead retained those earnings to purchase more diverse income streams (not more banks, but completely separate industries)?  Would they have needed bailout money? 

 

I think Glass Steagall preempts that.  For a commercial entity and a banking entity to be under the same roof potentially gives that commercial entity a very strong financing advantage, which, in a guaranteed deposit world, is arguably derived at the public's cost.  With the right management, it's not a bad thing, but regulation is never intended for the well behaved.  The closest banks got to own a legal "diverse income stream" is owning the credit card processors, Elavon in the case of US Bank, Vantiv in the case of Fifth Third, and they haven't been bad things to have during the tough times.  But such is life with these heavily regulated entities.

 

It figures that Glass Steagall is responsible for the financial crisis  ;)  Let's make sure these banks are heavily concentrated within banking -- good!

 

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Glass Steagall was repealed long before the 2008 financial crisis. Banks owned all sorts of stuff: insurance companies, leasing companies, real estate, physical assets. I don't think any of them owned any real industry probably cause it was too boring for them, but I don't think that they couldn't.

 

Plus if you want to get a little creative you could argue that GE Capital owned the industrial parts of GE.

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Somewhere in the annual letters to shareholders Buffett refers to all of his companies collectively as "the streams of income that form the mighty Amazon" (I'm paraphrasing).  I think it's quite a bit of his strategy is to prefer an acquisition over his own shares -- his own shares would have to be awfully tempting to be a better idea.  Or something like that.

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Somewhere in the annual letters to shareholders Buffett refers to all of his companies collectively as "the streams of income that form the mighty Amazon" (I'm paraphrasing).  I think it's quite a bit of his strategy is to prefer an acquisition over his own shares -- his own shares would have to be awfully tempting to be a better idea.  Or something like that.

 

It seems like Buffett has built Berkshire to withstand the downside to a greater degree than other entities are typically structured.  For an active / enterprising investor, this seems to have little value -- it isn't something engaged market participants are willing to pay for.  They / we will just sell a company in which we've lost confidence.

 

Berkshire is more like the result you might get from an arranged marriage which neither party can ever leave.

 

You might as well accept your fate and work together in a true partnership to better your conjoined futures.  Any alternative choice is irrational.

 

But, if either party can divorce (sell) at any time, the nature of the investment is entirely different. 

 

Berkshire probably has a better chance of being around 100 years from now than virtually any other business.  But, in a world where there is no fault divorce, I'm not sure that fact will ever be worth a premium and maybe it shouldn't be except for Buffett's image in posterity.  And, well, it's not unreasonable to argue that has little or no value to anyone but Buffett.

 

I own it because I think it will be around for my future and grow its value at a decent clip.  The deferral of taxes has a large value to me.  Divorce (selling) is very costly in a taxable account in the States.

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