What would you do.....

[Zorrofan]

fareastwarriors posted this on the general news thread but it made me wonder how many will stay "loyal" to BRK after WEB & CM are no longer in charge?  I will vote against any breakup, forgoing short-term gain for the long-term profit I believe BRK will continue to generate. What are your thoughts?

 

"After Decades of Hints, Buffett’s Heir May Now Be More Apparent

 

The pressure to dismantle Berkshire will mount. The bulwark against that impulse is his successor, whose identity is one of the business world’s best-kept secrets.

 

 

https://www.bloomberg.com/news/articles/2017-12-07/after-decades-of-hints-buffett-s-heir-may-now-be-more-apparent"

 

 

cheers

Zorro

[StubbleJumper]

I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes.

 

As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc).  With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his.  To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually.  So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders.

 

What about the next guy?  Or more likely the second or third guy after WEB?  Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO.  With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves.  It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company.  Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. 

 

When the CEOs and management teams of the subsidiaries sees this, how will they react?  WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs.  But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. 

 

To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie.  Larger because of the ridiculous annual cashflows and the stupendous market cap.  Incorrigible because there's no legitimate threat of a takeover.  The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up.  But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder.

 

Nope, my sense is that we will probably get lucky with the next guy and we'll get good management.  But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management.  Enjoy current management while it lasts -- it's too good to be true!

 

 

 

SJ

[Jurgis]

Can I get an option "I don't care"?

 

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

[Zorrofan]

I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes.

 

As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc).  With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his.  To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually.  So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders.

 

What about the next guy?  Or more likely the second or third guy after WEB?  Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO.  With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves.  It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company.  Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. 

 

When the CEOs and management teams of the subsidiaries sees this, how will they react?  WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs.  But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. 

 

To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie.  Larger because of the ridiculous annual cashflows and the stupendous market cap.  Incorrigible because there's no legitimate threat of a takeover.  The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up.  But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder.

 

Nope, my sense is that we will probably get lucky with the next guy and we'll get good management.  But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management.  Enjoy current management while it lasts -- it's too good to be true!

 

 

 

SJ

 

Sadly, you raise some good points. My original hope had been that the Gates Foundation would hold on to the shares WEB donated and through their own self-interest replace WEB as our guard against all the potential issues you raised.  I thought that a small dividend paid out after WEB & CM are gone would generate enough cash to meet the charity's IRS requirements. However it appears they are just going to sell the shares.

[Jurgis]

My original hope had been that the Gates Foundation would hold on to the shares WEB donated and through their own self-interest replace WEB as our guard against all the potential issues you raised... However it appears they are just going to sell the shares.

 

I'm pretty sure Gates foundation is not set up as perpetual foundation and/or Buffett's donation is not intended as perpetual contribution. Pretty sure there are conditions that the money to be used within certain timeframe, so yes, they have to sell the shares.

 

I don't remember the source, so you might have to hunt for it if you want confirmation. (Or maybe someone on CoBF will confirm or contradict the above).

[gfp]

The gates foundation is required to sell shares. They have been selling them much slower than would be required, as they have received some accommodation - but they are still required to sell and Warren was aware of the rules governing “excess business holdings” or whatever it’s called. Basically you can’t concentrate a foundation in a single stock so that foundations aren’t used to control companies (obviously abroad the rules are different, ikea etc..)

[John Hjorth]

The source is the original donation letter from Mr. Buffett to the Gates Foundation, where the condition is mentioned as increased spending [charity activity ramp up] in the foundation. I suppose otherwise there would be tax consequenses for Mr. Buffett personally.

There are three conditions to this lifetime pledge. First, at least one of you must remain alive and active in the policy-setting and administration of BMG. Second, BMG (or any intermediary) must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes. And, finally, the value of my annual gift must be fully additive to the spending of at least 5% of the Foundation’s net assets. I expect there to be a ramp-up period of two years during which this condition will not apply. But beginning in calendar 2009, BMG’s annual giving must be at least equal to the value of my previous year’s gift plus 5% of BMG’s net assets. If this amount is exceeded in any year, however, the excess can be carried forward and be offset against a shortfall in subsequent years. Similarly a shortfall in a given year can be made up in the following year.

[DooDiligence]

I wouldn't want to see a breakup / spinco event until after I fill up.

 

How about this though?

 

Are we agreed that Berkshire is not being valued today as a sum of the parts entity? (if not, then my premise breaks the rest of this post.)

 

What if everything except Geico & reinsurance was spun out in the most tax efficient manner possible and you have the option of rolling into the new entity like 1969? (prob have to keep See's too out of honor.)

 

I'd elect to own the new entity over MOST of the spinco's without hesitation!

 

You get the float.

 

Able, Jain, T & T get the privilege of starting the whole thing over again for another 2 or more generations!

 

---

 

A "Maybe" option should be added.

[cubsfan]

I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners

who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going

to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns

new investors coming in - that that is the case.

 

Am I missing something here??

[John Hjorth]

It's actually in the bull's eye!, cubsfan.

 

Earlier today, I was actually thinking about the hypothetical situation of new Berkshire CEO introducing a new version of the owners manual. How would that be received, if it contained material changes touched earlier in this topic by StubbleJumper?

 

Personally, I'm surprised by interim poll outcome so far. [Yes 9 - No 18 right now].

 

The breakup scenario actually playing out is a nightmare for me. I do not vote at the AGMs. The breakup scenario would make me go through that hassle.

[cubsfan]

Direct from the Owner's Manual:

 

11. You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns.........

Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.

 

IF you are going to pontificate on a breakup of Berkshire - I think it's very unlikely to happen. Warren keeps his promises, and

Howard Buffett, as the keeper of the culture is going to enforce this promise long after Warren has left the scene.

 

 

 

[DooDiligence]

I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners

who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going

to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns

new investors coming in - that that is the case.

 

Am I missing something here??

 

I'm embarrassed to say that I forgot this commitment.

 

Also forgot the benefits of being owned by BRK:

 

1. No more SEC filings

2. No more dog & pony shows

3. Former divs getting reinvested in the biz for more advantageous returns

4. ???

 

OK, I had abstained but now cast my no vote.

[StubbleJumper]

I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners

who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going

to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns

new investors coming in - that that is the case.

 

Am I missing something here??

 

 

Sure, that might be true for something like Nebraska Furniture or Borsheims.  But there's nothing that I know of that would prevent a spin of Mid American, BNSF, Dairy Queen, Sees, or many of the other subs.  And, the original owners of the businesses that WEB bought are not spring chickens either, so they'll be croaking too in the not too distant future.  At a certain point, the original family won't have much involvement in the management of their former company.

 

 

SJ

 

[cubsfan]

Stubble - fair point:

 

Those distinctions would make an excellent question for the annual meeting. I certainly don't understand it that way, and

it would be good for Buffett to clarify - because he makes no such distinction/exception in the Owner's Manual.

[StubbleJumper]

Stubble - fair point:

 

Those distinctions would make an excellent question for the annual meeting. I certainly don't understand it that way, and

it would be good for Buffett to clarify - because he makes no such distinction/exception in the Owner's Manual.

 

 

Well, not to put too fine a point on it, but what WEB says is pretty irrelevant.  The next CEO (or two or three CEOs in the future) can simply change the Owners Manual.  AFAIK, there's nothing legally binding about it.  Similarly, I'd be surprised if any of the assurances that Warren extended to previous owners was ever written in a purchase contract -- it was likely a gentlemen's agreement.  He'd be bonkers to make a legally binding promise to never sell an asset.

 

If a future CEO is somebody of dubious personal integrity, then all bets are off.

 

 

SJ

[rb]

IF you are going to pontificate on a breakup of Berkshire - I think it's very unlikely to happen. Warren keeps his promises, and

Howard Buffett, as the keeper of the culture is going to enforce this promise long after Warren has left the scene.

Cubsfan, I think you're pretty spot on with your posts. Not only will Howard be left behind as the enforcer but a lot of shares will be in the hands of various foundations. Yes, they have to sell shares and spend the money. But that will take a long time. So they'll be significant shareholders for the foreseeable future. How much do you want to bet that they've received specific instructions on how to vote in the case of a breakup?

 

On top of all that Berkshire will be a horrible mess to untangle (by design?) with the insurance cos owning operating subs, etc, etc.

 

Furthermore trying to break up Berkshire can be a career ending event. Berkshire has shitloads of shareholders that don't sell their shares and are patient in collecting their returns/value. These types don't jump up cause the stock might get a pop from a corporate event and may very well be angered by the thought. They may very well lash out at who gets the brilliant idea. Being CEO of Berkshire will be a pretty sweet gig for anyone. Why would one risk that just to try a breakup? I'm pretty sure the CEO's contract will not have a clause where he gets to walk away with $100 million in the event of a breakup as is the case with other companies.

 

Finally, a breakup would be a value destructive event and thus pretty stupid. Berkshire benefits a lot from the fact that subs can cross-pollinate each other with capital which results in efficient allocation of capital. A lot of capital deployment actually happens at the sub level. Let's take MidAmerican for example. It never paid a dividend to HQ. Is that because Berkshire doesn't like divvies (other subs have strict dividend requirements)? Or is it because MidAmerican had and attractive set of investment opportunities that HQ didn't and thus that money was more valuable in their hands than HQ? Do you then think that MidAmerican would be more valuable as a stand alone entity where it would pay out 60-80% of its earnings or in its current form inside of Berkshire?

[John Hjorth]

...  Let's take MidAmerican for example. It never paid a dividend to HQ. Is that because Berkshire doesn't like divvies (other subs have strict dividend requirements)? Or is it because MidAmerican had and attractive set of investment opportunities that HQ didn't and thus that money was more valuable in their hands than HQ? Do you then think that MidAmerican would be more valuable as a stand alone entity where it would pay out 60-80% of its earnings or in its current form inside of Berkshire?

 

No, rb, There are minority shareholders that Berkshire is loyal to, and then there are minority shareholders down in the whole system, that are in the doghouse. Mr. Sokol is one of these.

[Guest longinvestor]

Terrific thread. Here's my two cents, probably less.

 

Buffett owned some 33% of the company before the giving started. As many have pointed out, that ownership lis largely going to the foundations. Buffett made the statement that he used to worry about the breakup some time back but doesn't any more. There's likely covenants etc. In place in the trustees hands. There's another 12 years of his giving away, I think. Imo, the key piece of the puzzle is the stock buyback. They are likely to keep the threshold close to 1.2x and, let's say 15 years from now, the BV is so far off from IV that they raise the threshold to close to 2. Should Berkshire be selling for over2x, well, the breakup artistes disappear, anyway. Buy enough to offset Buffett 's 33%. In the meantime, insiders buy up from the current 10% ownership(read Cunningham).

 

They'll make it impossible to break Berkshire up. That 'll be one hell of a proxy fight, should someone want to try. I don't think I live to see that day. Too bad.

[DooDiligence]

Stubble - fair point:

 

Those distinctions would make an excellent question for the annual meeting. I certainly don't understand it that way, and

it would be good for Buffett to clarify - because he makes no such distinction/exception in the Owner's Manual.

 

Awesome Q to ask & very pertinent in light of succession speculation.

 

Who's gonna nut up & get in line to ask?

 

I'd be tempted to show up this year just to watch that (especially if it was someone from COBF!)

 

And to watch Munger try to beat the crap out of the guy with a gigantic Porterhouse in the parking lot of Gorat's!!!

(this would only happen if the question blindsided him, which I doubt it would...)

[DooDiligence]

Terrific thread. Here's my two cents, probably less.

 

Buffett owned some 33% of the company before the giving started. As many have pointed out, that ownership lis largely going to the foundations. Buffett made the statement that he used to worry about the breakup some time back but doesn't any more. There's likely covenants etc. In place in the trustees hands. There's another 12 years of his giving away, I think. Imo, the key piece of the puzzle is the stock buyback. They are likely to keep the threshold close to 1.2x and, let's say 15 years from now, the BV is so far off from IV that they raise the threshold to close to 2. Should Berkshire be selling for over2x, well, the breakup artistes disappear, anyway. Buy enough to offset Buffett 's 33%. In the meantime, insiders buy up from the current 10% ownership(read Cunningham).

 

They'll make it impossible to break Berkshire up. That 'll be one hell of a proxy fight, should someone want to try. I don't think I live to see that day. Too bad.

 

Here's to there being no skeletons for a douche like Singer to get ahold of.

[cubsfan]

 

Awesome Q to ask & very pertinent in light of succession speculation.

 

Who's gonna nut up & get in line to ask?

 

I'd be tempted to show up this year just to watch that (especially if it was someone from COBF!)

 

 

DD - we're voting you in on that one. Get up at 2:00am, get in line, and you'll be first guy at the mike

        I'm sleeping in!

 

 

[DooDiligence]

 

Awesome Q to ask & very pertinent in light of succession speculation.

 

Who's gonna nut up & get in line to ask?

 

I'd be tempted to show up this year just to watch that (especially if it was someone from COBF!)

 

 

DD - we're voting you in on that one. Get up at 2:00am, get in line, and you'll be first guy at the mike

        I'm sleeping in!

 

Can't, Munger scares me & I love a good Porterhouse but not in that way.

 

 

 

Still might go though since I'm an owner now!

[rkbabang]

Can I get an option "I don't care"?

 

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

 

 

I don't think you are the only one.  I expect the stock to tank on that day and I expect to back up the truck if it does.

 

[rb]

My truck stands ready as well.

[Gregmal]

Can I get an option "I don't care"?

 

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

 

 

I don't think you are the only one.  I expect the stock to tank on that day and I expect to back up the truck if it does.

 

Warren is irreplaceable. Maybe the effects won't be immediate. Maybe they take a decade or two, but many great and valuable businesses often gradually turn into country clubs once their founding members turn over. It's one of the reasons many rollups do not work.