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Berkshire Hathaway - Break it up? - Size is the anchor of performance


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I thought there would be a discussion about breaking Berkshire Hathaway up, but I didn't find one. I've been a shareholder for almost 20 years. Buffett was asked the question of a break-up at the AGM, but it's not what I would envision. Maybe break up in 2 or 3 different companies with a stock for each -- no tax consequence. Not selling off the pieces. You can have an insurance entity and the related float required to support it / another business with the operating entities (option for a 3rd company with excess capital). Could lead to greater outperformance since size is the anchor of performance.

 

Thoughts?

 

 

AGM - Buffett response

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If you keeps the shares of the 3 you will have the same asset, same cash-flow and more overhead and less flexibility. I can’t see how it will create value. Market price can go up for a moment but as a decade holder it will not matter.

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If you keeps the shares of the 3 you will have the same asset, same cash-flow and more overhead and less flexibility. I can’t see how it will create value. Market price can go up for a moment but as a decade holder it will not matter.

 

Spin offs create value all the time, mostly by improving capital allocation across businesses. That hasn't been an issue under WEB. But his time is closer to the end than the start, and BRK is pretty complicated now.

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If you keeps the shares of the 3 you will have the same asset, same cash-flow and more overhead and less flexibility. I can’t see how it will create value. Market price can go up for a moment but as a decade holder it will not matter.

 

If you keeps the shares of the 3 you will have the same asset, same cash-flow and more overhead and less flexibility. I can’t see how it will create value. Market price can go up for a moment but as a decade holder it will not matter.

 

I'm not focused on day they do it re: stock price reaction. I'm looking at what the intrinsic value would be in a decade and would argue the case it would be higher in aggregate. You would have each manager be able to look at smaller investment opportunities. The businesses that Berkshire has acquired they are not trading / disposing -- might just be a yield play. That's if you kept the weight of the 3.

 

I might want more exposure to the new capital that is deployed over the following 10 years and maybe would weight more heavily towards that entity (for example maybe there is excess capital of $50 B -- or pick your number).

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WEB has said if he were working with a smaller capital base, he could provide better returns.

 

Seems like carving out divisions would give him a chance to prove it.

 

Spins could easily get rerated by markets.

 

—-

 

Edit: just my unsophisticated, heretical, 2 cents.

 

There are tons of businesses inside BRK that would be big enough to stand alone. The energy business and the railroad would both be among the largest in their fields.

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Two counterpoints:

 

1- capital allocation is a benefit across the LOBs. There is a benefit for railroads having access to insurance capital, for example

2- he will have to 'unwind' relationships which at his late stage in life (or if ever) he may be unwilling to do. what does his promise of a 'permanent' home really mean, then?

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Distributing cash is another simple method, but in the past I think he has argued that the shareholders would rather have him manage the cash, or be better off if he did so as opposed to leaving them to make the decisions.  He could make that argument again in the case of spinoffs.

 

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100% of the membership interests of Burlington Northern Santa Fe, LLC outstanding as of February 21, 2020 is held by National Indemnity Company, a wholly-owned subsidiary of Berkshire Hathaway Inc.

 

LC, BNSF is 100% owned by National Indemnity (10-K quoted above), and provides capital to the insurance operation; BNSF does not (on my view) benefit. Independent peer, UNP has no problem raising equally cheap debt capital.

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Distributing cash is another simple method, but in the past I think he has argued that the shareholders would rather have him manage the cash, or be better off if he did so as opposed to leaving them to make the decisions.  He could make that argument again in the case of spinoffs.

 

They are distributing cash now through buybacks.  Sopping up some of the undervaluation will gin up the price which is what most folks are really complaining about.  Berkshire is a growth company, but priced like a BV multiple play.

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They are distributing cash now through buybacks.

 

That's not what I meant because it doesn't raise the issue that I mentioned of the shareholder not knowing how to allocate the cash.  I had my head stuck in the past when I remember he had addressed the topic back when dividends were asked for.  But yes, beginning the sentence the way I did was prone to confusion.

 

My point is that the shareholders similarly wouldn't know what to do with the shares distributed.

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They are distributing cash now through buybacks.

 

That's not what I meant because it doesn't raise the issue that I mentioned of the shareholder not knowing how to allocate the cash.  I had my head stuck in the past when I remember he had addressed the topic back when dividends were asked for.  But yes, beginning the sentence the way I did was prone to confusion.

 

My point is that the shareholders similarly wouldn't know what to do with the shares distributed.

 

Acknowledging that WEB will never break up his life's work (and he's earned that right, imo), shareholders wouldn't have to do anything if they didn't want to. Exactly like now.

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They are distributing cash now through buybacks.

 

That's not what I meant because it doesn't raise the issue that I mentioned of the shareholder not knowing how to allocate the cash.  I had my head stuck in the past when I remember he had addressed the topic back when dividends were asked for.  But yes, beginning the sentence the way I did was prone to confusion.

 

My point is that the shareholders similarly wouldn't know what to do with the shares distributed.

Fair point.  Shares distributed would encounter the same issue of the shareholder doing a worse job of cash allocation than BRK.  Spin-off shares could easily get flipped where retention is probably the better option.

 

On distribution of cash vs buyvacks, Buffett has always leaned to repurchases.  Chris Bloomstran laid out the hierarchy of decisions using DIS as the example:

https://threadreaderapp.com/thread/1322554127298240515.html

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I prefer to keep it they way it is with decentralized ops and centralized capital allocation. But he should turn up the buybacks, even at these levels, and I think he will. Berkshire has been undervalued for too long, and the attitude of central banks makes distressed deals less likely. If he turns up the buybacks and gets himself a decent currency, it would hurt less if a wounded elephant came around and he had to issue a bit of equity to bag it.

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They are distributing cash now through buybacks.

 

That's not what I meant because it doesn't raise the issue that I mentioned of the shareholder not knowing how to allocate the cash.  I had my head stuck in the past when I remember he had addressed the topic back when dividends were asked for.  But yes, beginning the sentence the way I did was prone to confusion.

 

My point is that the shareholders similarly wouldn't know what to do with the shares distributed.

 

Acknowledging that WEB will never break up his life's work (and he's earned that right, imo), shareholders wouldn't have to do anything if they didn't want to. Exactly like now.

 

I look at it more like a garden that gets harvested, rather than broken up.

 

I think shareholders would do much better & like you said, we wouldn’t have to do anything.

 

How much extra capital would BHE & BNSF have to work with (and could they use it) if they didn’t send it to Omaha to be stuffed into a mattress?

 

Could Omaha really put up better numbers from a smaller base with insurance as the core operation?

 

I’d love to own a piece of all 3 entities separately & to get the option of a cash kicker or ownership stake in the other spincos (jewelry / retail, building materials, etc.)

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They are distributing cash now through buybacks.

 

That's not what I meant because it doesn't raise the issue that I mentioned of the shareholder not knowing how to allocate the cash.  I had my head stuck in the past when I remember he had addressed the topic back when dividends were asked for.  But yes, beginning the sentence the way I did was prone to confusion.

 

My point is that the shareholders similarly wouldn't know what to do with the shares distributed.

 

Acknowledging that WEB will never break up his life's work (and he's earned that right, imo), shareholders wouldn't have to do anything if they didn't want to. Exactly like now.

 

I look at it more like a garden that gets harvested, rather than broken up.

 

I think shareholders would do much better & like you said, we wouldn’t have to do anything.

 

How much extra capital would BHE & BNSF have to work with (and could they use it) if they didn’t send it to Omaha to be stuffed into a mattress?

 

Could Omaha really put up better numbers from a smaller base with insurance as the core operation?

 

I’d love to own a piece of all 3 entities separately & to get the option of a cash kicker or ownership stake in the other spincos (jewelry / retail, building materials, etc.)

 

BHE has never paid a dividend since BRK bought it. BNSF has paid BRK $36.95bn in dividends from 2010-2019. Buffett has said they'd put more to work at BNSF if they could, there's just no place to do it. So no business that has a reasonable prospect of return is starved for capital at BRK.

 

The short answer to breaking up/spinning off BRK subs is it's a bad idea. No additional cash flow would be created therefore no additional value would be created.

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BHE doesn't pay dividend to the holding company. I think Berkshire invests regularly in it.

BNSF has guaranteed ROE from regulator and hence Berkshire would likely to invest more capital in it rather than take out. Rather both of these businesses were outlined as places to invest incremental cash generated by other businesses.

 

Berkshire has always operated by buying undervalued companies generating free cash flow (sometimes growing) and then investing those cash flows into other businesses. Over last 20 years they have pivoted to buy whole companies rather than common stock investments.

 

How would break up be better than current decentralized structure which enables capital allocation across different businesses? Berkshire is bet on capital allocated better internally within company over capital allocation in security market. Current structure allows tax efficient allocation over active management.

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I stand corrected.

 

Can I at least get a rerating by the market on the separate entities?

I mean seriously, you couldn’t build either BNSF or BHE for barely over book.

 

I think it would almost certainly re-rate if they broke it up. GEICO would be another candidate that would trade at a higher valuation than the holdco if separated.

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I forgot where but I heard other railroad companies have been more efficient than BNSF.  Maybe there's some mismanagement or complacency within BRK?

 

No.  Other railroads have used Precision Scheduled Railroading, which basically limits the # of trains to very specific times and is not flexable for customers.  It improves operating margins by 300-400bps for several reasons - but makes customers unhappy.  Buffett has said that BNSF is gaining customers b/c BNSF does not use PSR currently. 

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Ultimately I think PSR risks breaking the bond between regulators and the monopolies / oligopolies that are the railroads. Buffett won't say it as directly, but that's pretty much the gist of BNSF/Berkshire's view on PSR. Why mess up a cozy high ROE business for more earnings, particularly as the US swings more democrat?

 

Rose: Absolutely. It’s not. Let me tell you why. If you go back to the 1980s, you saw where some railroads had a singular focus on operating ratio. And the easiest way to reduce operating ratio is to take out track and reduce maintenance expenses. That’s really not the covenant, if you will, we have with our regulator, the STB, and even public policy makers. The Staggers Act wasn’t, “Railroads, haul only what you want to haul on your network.” It’s “Haul everything, and you have the ability and the flexibility to differentially price on your network.” That’s the deal, and it’s in the public’s best interest to move more tons to the railroad network, not to move tons off the railroad network.

 

.” Warren talks about this in his annual letter. He says that we make these investments with the belief that the future regulator—not the regulator who’s there today, the regulator who’s there tomorrow—will take all this into account. I simply call it the unwritten commitment. That is, we spend enormous amounts of capital on these networks, and we get a regulator who allows us to provide good returns. All that’s worked, I think, pretty well.

 

 

https://www.railwayage.com/news/matt-rose-less-is-not-better/

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I stand corrected.

 

Can I at least get a rerating by the market on the separate entities?

I mean seriously, you couldn’t build either BNSF or BHE for barely over book.

 

That is what I said at the begining : traders would have a short term profit, decades holder will loose. Ask yourself which one Warren wants to be happy and you know what he will do.

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one thing I've wondered is whether or not Berkshire would be helped or hurt from a regulatory standpoint if BNSF / BE floated 10% public stakes, which would put a market value on them.

 

the conventional wisdom would be that a 10% float stock would trade at a discount to peers, though I'm not sure that's the case as the float would be big enough to attract a liquid diversified but high quality shareholder base (10% of BNSF would be a $12-$16B company), you could probably build a decent shareholder register quite easily, and the governance concerns with a minority stub, in my view would be mitigated by the berkshire brand / very understandable capital allocation policies (BNSF distributes cash as it can, BE retains earnigns)

 

would the market look on Berkshire differently if instead of owning these 2 businesses privately (worth about $200B in my view: UNP + 2x book for BE = $200B, $150B if you're feeling conservative and value-y) Berkshire owned 90% of them and 10% floated freely. they are already SEC filers with independent capital raising ability.

 

tax consolidation would still exist above 80% ownership IIRC.

 

would Berkshire as a business benefit from this?

 

 

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I definately see your point, and it might get a higher mark that way, but I'm not sure public investors would care much for a Utility Company that doesn't pay dividends, and it would make it harder to shift capital allocation quickly (say BNSF saw an interesting expansion opportunity and wanted to retain all capital one year - not that it's very likely). Mostly though, I think it would require additional management focus and possibly public scrutiny. Don't see it happening under Warren, maybe later.

 

 

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