The Buffett ‘Put’ Gives a Hint of What’s Coming: Alice Schroeder
One of the biggest questions surrounding Berkshire Hathaway stock has been what happens the day Warren Buffett retires or gets hit by the proverbial truck.
Now we know the answer. The stock will trade at least 10 percent higher than Berkshire’s book value, or roughly what’s left after liabilities are subtracted from assets.
We can infer this from Berkshire’s open-ended share repurchase plan, in which it may buy back stock any time the shares fall below 110 percent of book value as long as the company has $20 billion in cash and equivalents on hand.
Among the reasons Berkshire cited for the buyback plan was the recent stock price -- $100,000 for the Class A shares -- which the company said was considerably less than the value of its underlying businesses. The A shares rose 8.1 percent on Sept. 26, the day of the announcement, to $108,449. The stock closed at $106,500 yesterday.
Buffett wants Berkshire’s stock price to reflect its “intrinsic value,” which in his opinion should be a premium to stated book value. But this has never been a reason for a share buyback before. Buffett has always cited other, better opportunities, or the need to hold dry powder for when they might appear.
Even during the worst of the financial crisis from September 2008 to March 2009, when Berkshire’s stock fell by 50 percent, the company didn’t start a buyback. Only once in the past four decades, in 2000 at the peak of the Internet bubble, did Berkshire offer to repurchase shares. In the end, it didn’t because the announcement drove up the stock price so much.
‘Not a Dime’
In January 2010, Buffett said the shares were undervalued and regretted having to use them for the stock portion of the $34 billion acquisition of Burlington Northern Santa Fe. In his latest shareholder letter this February, Buffett made it a point of honor to say that “not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years.”
Now that Buffett has done it, the main effect is to set a floor under the stock. Although book value is subject to market fluctuations, Berkshire’s existing businesses over time will grow, increasing book value. Think of it this way: An option to sell, or “put,” the stock back to Berkshire at 110 percent of a rising book value is dear -- assuming, of course, that the company does go ahead with repurchasing shares. This again raises the question of why Buffett would make such a commitment simply because the stock is undervalued today.
I believe that setting up a standing repurchase authorization amounts to a statement that Buffett’s days of bagging elephants are growing short. It’s no longer a sure thing that he will be able to personally deploy Berkshire’s swelling stash of capital. Moreover, the buyback terms will support the shares at 110 percent of book value even if there is bad news. And the one piece of information most likely to hurt the stock would be that Buffett, 81, was retiring or could no longer run the company.
More than a few people have wondered whether Buffett would really be so sorry if the stock got a haircut if he left. It’s flattering to think that the price of Berkshire stock rests on his shoulders alone. The problem with this idea is that Buffett’s friends and partners will pay the price. They are selling large amounts of stock now and in the next few years to make bequests and donations. They include Buffett’s original investors in his first partnership, the Bill & Melinda Gates Foundation and his children’s charities. Seeing them sell their Berkshire stock at a depressed price isn’t something Buffett wants.
Thinking of Succession
This also isn’t the first sign that Buffett and Berkshire’s board are thinking of succession. After last year’s bungled handling of Chief Executive Officer David Sokol’s departure amid allegations that his investments violated Berkshire’s ethics code, there are signs that Berkshire’s board is stepping up its oversight and governance. Berkshire directors met, at least informally, with Ted Weschler before Buffett hired him this month as an investment manager, and something resembling a due diligence process was followed. I expect it won’t be long before the board starts meeting more than twice a year, makes some changes to its committee structure and begins replacing older directors with younger ones not so closely tied to Buffett.
Changes to the board may figure in to who’s picked to be Berkshire’s next CEO. Berkshire’s statement about Weschler’s hiring mentioned Buffett’s retirement for the first time and referred to the period “after” he is CEO. This hint that changes in the CEO job are coming -- if not necessarily in the chairmanship, which Buffett also holds -- coincides with another change.
This July, Berkshire’s vice chairman, Charles T. Munger, said he would end his popular investor meetings in Pasadena, California. Munger, who turns 88 in January, traditionally appears on stage with Buffett at Berkshire’s annual meeting, an exercise that can last six hours. That can’t be getting easier. Surely Buffett doesn’t want to be up there by himself. Whether he’s ready to talk about it or not, it’s a matter of time -- maybe a short time -- before he invites another manager, or maybe two, to join him in the limelight.
(Alice Schroeder, the author of “The Snowball: Warren Buffett and the Business of Life” and formerly a top-ranked insurance analyst on Wall Street, is a Bloomberg View columnist. She owns Berkshire Hathaway stock. The opinions expressed are her own.)
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