Greg Abel named successor

[CapriciousCapital]

If you watched/read the AGM (or read the thread where I quoted this), you knew about Munger saying "Greg will keep the culture" followed by silence and no comment from Buffett.

Well, today it's official.

https://www.wsj.com/articles/berkshire-chooses-greg-abel-as-warren-buffetts-successor-in-ceo-role-11620054866

[Nomad]

Wow, Munger really did let the cat out of the bag on that one! Greg seems like a great leader, very candid, humble, and capable. 

Nevertheless, I'm hoping for many more years of WEB and CM at the helm. 

[LearningMachine]

I wonder what the conversation between Munger and Buffett was like after that, and if Buffett is thinking he will need to be more cautious with Munger leaking things that they had presumably jointly agreed to not yet share publicly :-).

Edited May 3, 2021 by LearningMachine

[wisowis]

I think Warren let it slip before Charlie:

 

Quote

Warren Buffett

Well, it's too large to do certain things, that's for sure. I mean it's not -- we can't spend our time looking for $100 million acquisitions. But we have a wonderful company in Fort Worth, and we had a marvelous man running it and he died recently. But he ran it -- he sold it to me 15 years ago, and he just basically ran it. And I couldn't find my way to the company.

We've got this terrific company that makes recreational vehicles in Elkhart -- based in Elkhart, Indiana. And we bought it 15 years ago. I've never been there. Maybe there's some guy in the closet just making up numbers to send to me every month. But I feel I understand the business pretty well, but I've never seen it. And the fellow that runs it, he likes running it, and he likes me keeping my nose out of it. And he'll let Greg in a little more than he'll let me.

But it's -- we've got a system that will work with wonderful businesses and wonderful managers. And it's up to us to find them, but it's also us (sic) to nurture them when we find them.

And if you get somebody like Paul Andrews who ran TTI and who build it from nothing, absolutely nothing, nobody ever heard of him. And the earnings have octupled during the period that he ran it for us. And he was happy. Employees were happy. He was a wonderful man. We were happy.

And I would call him at the end of the year and I'd say, "Paul, this place is -- you're shooting the lights out everything, and you should take a raise." And he said -- or bonus. He'd say, "Well, we'll talk about that next year, Warren." I mean he just loved -- he loved the business. I love Berkshire. He loved the business.

And I wasn't going to add anything by having him do a lot of bunch of reports about how much he's using in a way of carbon or anything. It just -- it's ridiculous to think of a guy like Paul Andrews behaving in an antisocial matter or anything of the sort. And we'd love to have more of those.

And obviously as we get bigger, they get harder to buy, but we've got a number in the place. And I don't think we bought our last one over time, but I certainly don't see anything in the near future at all.

But we're intensifying our interest a little bit in the ones we have by repurchasing shares. So our shareholders own more of those companies every year while we're -- assuming we're repurchasing shares, which is price-sensitive. Charlie?

Charles Munger

Yes, I don't think we're getting too big to manage. Because we're different from practically every other big corporation in the United States in that we are so excessively decentralized. We have decentralized so much and we have so much authority in the subsidiaries that we can keep doing it for a long, long time as long as it keeps working. And I would say so far that our decentralization has caused more benefits than defects, but nobody seems to copy us.

Warren Buffett

Well, that's absolutely true, but I would say this decentralization won't work unless you have the right kind of culture accompanying it.

Charles Munger

Yes, but we do.

Warren Buffett

Yes, we do, but it's dependent on us. I mean...

Charles Munger

Greg will keep the culture.

 

 

[gfp]

I think Buffett's point in that quote was that all the non-insurance subsidiary managers, Pete Liegl included, already report to Greg.  But it's not some big secret that Charlie let out of the bag.  Berkshire has been quite clear in their actions that Greg was one step away from being the CEO.  It also probably has something to do with Warren's constant praise of Tim Cook if you think about it.

[valueinvesting101]

Succession was constantly recurring question raised in media about Berkshire for probably last 20-25 years. There were hints in Charlie's 50 year letter and also in elevation of Ajit Jain and Greg Abel to the board and appointee as VC. 

When formal announcement has been finally been made, there is hardly any impact on the stock price.

Stock price had bigger impact from announcement of increased buyback executed during 2nd half of 2020.

[CorpRaider]

19 hours ago, gfp said:

I think Buffett's point in that quote was that all the non-insurance subsidiary managers, Pete Liegl included, already report to Greg.  But it's not some big secret that Charlie let out of the bag.  Berkshire has been quite clear in their actions that Greg was one step away from being the CEO.  It also probably has something to do with Warren's constant praise of Tim Cook if you think about it.

I agree 100%.  I'm surprised by all the hullabaloo. I'm pretty sure Munger already said "Greg and Ajit will keep doing x" like two years ago and I mean was there any doubt he was tentatively (David Sokol was almost certainly the guy at one point so stuff can change...hell Warren could outlive Greg....wouldn't be a world record) the guy when during the covid shutdown there were two people on the screen and one was Greg Abel?

Like I wrote on my blog last year after the meeting it was really comforting to hear him talk last year.  He gets the model (at least as I understand it).

Edited May 4, 2021 by CorpRaider

[LC]

44 minutes ago, CorpRaider said:

the guy when during the covid shutdown there were two people on the screen and one was Greg Abel

This was the smoking gun in retrospect, although as it has been correctly noted, not really too important. 

[Drokos]

My only knock on Greg is his BRK holdings (or lack there of), which is a big issue to me. $16m a year cash salary but his BRK holdings are less than $3m??? Ajit has $100m+ of BRK. Is he really going to protect the business as much as someone with 98% of their net worth in BRK? I know he owns (or owned) a stake a BHE but it doesn't give me much comfort to have a leader that has skin in only one subsidiary. Hopefully I am missing something.

[Cigarbutt]

42 minutes ago, Drokos said:

My only knock on Greg is his BRK holdings (or lack there of), which is a big issue to me. $16m a year cash salary but his BRK holdings are less than $3m??? Ajit has $100m+ of BRK. Is he really going to protect the business as much as someone with 98% of their net worth in BRK? I know he owns (or owned) a stake a BHE but it doesn't give me much comfort to have a leader that has skin in only one subsidiary. Hopefully I am missing something.

From @gfp in the BHE thread (March 3rd 2021):

"Berkshire basically facilitated the transfer of Sokol's stock to Abel by financing Abel's purchase of stock.  That's how Abel was able to afford a block of stock currently worth over $500 million.  Abel's BHE shares are convertible into BRK.B shares and that is what I ultimately expect to happen once Greg is CEO of Berkshire."

From the recent BHE 10-K and proxy and further documented buyback of Mr. Walter Scott's minority stake, the fair value (the 1% of implied equity value) of Mr. Abel's stake is well above 500M at this point.

[gfp]

At the time I posted that, I believed that Berkshire facilitated the transfer of Sokol's stock to Abel but that is not how it went.  I now believe that Sokol's shares were repurchased by MEHC (BHE predecessor) under the shareholder agreement "put" option that Walter Scott's family often uses to sell BHE shares back to the company.

With Dave Sokol still at MidAmerican, Sokol owned 1.6% on a fully diluted basis, and Greg Abel already owned 1% on a fully diluted basis.  Greg didn't technically own all 1% yet, but would eventually vest that amount (I believe he currently owns 740,961 BHE shares out of a total of 76,368,874 BHE shares).

The mechanism where Abel's (and Scott family's) BHE shares can be converted to Berkshire Hathaway Class A or B shares is the Shareholder's agreement, as amended on December 7, 2005 (originally from 3/14/2000).

Back in 2016, according to this blurb from a BHE filing, Abel's BHE shares would have converted to 1,906 A-shares (A-shares were about $194,360 apiece at the time), giving his BHE shares approximately the same valuation in Berkshire shares as the cash-put price that the Scott family was using.  (an approximate $37 Billion equity valuation for all of BHE in 2015-2016.

The most recent BHE price / share "print" that I know of is from Q1 2020, which was $698.61 / share, implying a Q1 2020 equity value for BHE of $53.35 Billion.  That figure would be higher today, but it appears that a year ago Greg owned BHE stock convertible into $517.64 million worth of Berkshire Hathaway common shares (his choice of A or B).

 

Quote

In accordance with a shareholders' agreement, as amended on December 7, 2005, based on an assumed value for BHE's common stock and the closing price of Berkshire Hathaway common stock on January 31, 2016, Mr. Scott and the Scott Family Interests and Mr. Abel would be entitled to exchange their shares of BHE common stock for either 18,131 and 1,906, respectively, shares of Berkshire Hathaway Class A stock or 27,155,822 and 2,854,901, respectively, shares of Berkshire Hathaway Class B stock. Assuming an exchange of all available BHE shares into either Berkshire Hathaway Class A shares or Berkshire Hathaway Class B shares, Mr. Scott and the Scott Family Interests would beneficially own 2.2% of the outstanding shares of Berkshire Hathaway Class A stock or 2.1% of the outstanding shares of Berkshire Hathaway Class B stock, and Mr. Abel would beneficially own less than 1% of the outstanding shares of either class of stock.

 

 

[gfp]

For the critics complaining that Abel and Jain are paid too much in their current Vice Chair roles, here are the last three years of compensation Greg earned as a lowly subsidiary manager:

(spoiler alert: $79 million over 3 years)

[gfp]

Digging a little further, I see that Sokol converted his MEHC shares to Berkshire common shares.  MEHC did not repurchase shares during the relevant period where Sokol disposed of his ownership stake.  Interestingly, the deal is way better for Sokol/Abel when Berkshire Hathaway common shares are undervalued, as the Energy shares are valued subject to a formula for "fair value" but the Berkshire Hathaway shares are valued at the market price.

"On January 24, 2008, Mr. Sokol exchanged 629,931 shares of our [MEHC] common stock for 955 Berkshire Hathaway Class A shares and three Berkshire Hathaway Class B shares."

 

Sokol still had outstanding options to acquire 549,277 MEHC shares for $35.05 / share, which he apparently exercised and ultimately ended up owning 1418 A-shares and 4250 B-shares in 2011 when he left Berkshire in 2011.  Presumably he had also sold some Berkshire shares along the way.

Berkshire still pays Sokol $1 million per year for the rest of his and/or his wife's life incidentally - the maximum benefit under his plan.

[Munger_Disciple]

gfp, you rock! That is an awesome analysis of Greg's ownership. You are truly the go-to guy on Berkshire. 

[IceCreamMan]

https://www.marketwatch.com/story/berkshire-hathaways-ceo-in-waiting-has-a-lot-of-warren-buffett-in-him-plus-more-11620156155

[gfp]

https://www.ft.com/content/2438b16f-c4ca-4a5e-b1c2-07b3fbc0bc35

It's been rare to have David Sokol comment publicly on Berkshire since his resignation, but here he speaks to the FT about Abel.  Worth a read.  I believe you can skip the paywall a few different ways.  Answer some survey questions or something like that

[Munger_Disciple]

I thought Ron Olson's comments in the FT article are interesting: 

“Warren’s got a lot of life left. I want to underscore that,” Olson said. “Greg is our man at the moment. If it’s 10 years from now, who the hell knows.”

Edited May 7, 2021 by Munger_Disciple

[omagh]

3 hours ago, gfp said:

https://www.ft.com/content/2438b16f-c4ca-4a5e-b1c2-07b3fbc0bc35

It's been rare to have David Sokol comment publicly on Berkshire since his resignation, but here he speaks to the FT about Abel.  Worth a read.  I believe you can skip the paywall a few different ways.  Answer some survey questions or something like that

Interesting bit as well.  It speaks to his involvement in analysis of deals and to his grounding in accounting.  He'll work well with Ted and Todd given this background.  Buffett is so smart in the selective quality of people with which he surrounds himself.

Abel found his way to the company through one of its many acquisitions. After working as an accountant at PwC in San Francisco, in 1992 he went to work for one of the firm’s energy clients, a small business known as CalEnergy. “Anything I asked him to do he did 125 per cent and then looked at things around it to do better as well,” Sokol said, who was running CalEnergy. “Greg needed very little mentoring. What he required was just being given the opportunities.” CalEnergy under Sokol and Abel went on a dealmaking spree before Berkshire bought the company in 2000. Before he had turned 40, Abel had been elevated to president and chief operating officer of the energy unit, going on to own a valuable 1 per cent stake in it. It was there where he gained much of his dealmaking chops. The division has accounted for some of Berkshire’s biggest takeovers, a fact that has not been missed by shareholders who grumble about the mammoth $145.4bn cash pile the conglomerate has amassed.