Tuesday, January 13, 2009

Berkshire Hathaway Post Warren Buffett

The legendary investor, Warren Buffett, when asked what will happen when he is no longer at the helm of Berkshire, always is quick to assure us that he has identified qualified successors to run the company and manage the investment portfolio. Besides, he feels fine and his doctors proclaim him in good health. I believe Warren. He has a plan and who am I to possibly criticize the individuals that he selects as his heirs apparent? Additionally, his diet is similar to mine, lots of cheeseburgers and steaks and, best that I can tell, his exercise routine is as infrequent as mine. So, I’m not worried about Warren’s imminent demise or his designation of successor management.

Conventional wisdom has it that the Berkshire price is discounted for the eventual death of its legendary investor and leader. It also is likely discounted for the conglomerate nature of Berkshire with its many disparate parts. Despite the discounts, Berkshire has been a wonderful success story financially for its shareholders and an important instructive lesson in prudent investment techniques and business ethics. While I no longer hold a Berkshire position, I have certainly benefited from Warren’s performance, discount or no discount.

If Berkshire is such a wonderful company and it sells at a discount already that reflects the ultimate demise of Warren, then why should we be concerned about that eventual happening? The answer is found in the composition of the company’s portfolio of businesses. Fabulously successful entrepreneurs exchanged control of their companies to Berkshire for lots of cash and the ability to continue to run their baby unhindered, plus access to, and the friendship of Warren Buffett. For years the tradeoff has worked wonderfully for all concerned.

I would suspect that Buffett would suggest to his successors that they manage Berkshire as he has, both in the investment area and in the shepherding of the conglomerate companies and their managers. But will they? Strong managers tend to put their own stamp on the companies they run. They also won’t be given the benefit of the doubt, as Warren was, because of his esteemed reputation, in similar situations to Salomon Brothers and General Re. The new guy[s] will know that they won’t get any free pass and will want to keep a closer watch on subsidiaries than Warren does. That will mean more reporting and trips to Omaha for consultations. Home office staff increases and reporting responsibilities will evolve and, of course, there won’t be any phone calls or interaction with Warren. Instead there will be reporting and performance reviews.

Expectations, reporting, and performance reviews are appropriate, but if you are already a billionaire and your family is financially set are you willing to be second guessed by a mere multimillionaire CEO? Maybe the world’s richest man is worthy of asking you about your subsidiary’s latest quarterly results, but how will it sit when a new CEO inquires and has suggestions and expectations. Tension is inevitable.

The bulk of Berkshire is insurance and its invested float. That shouldn’t be impacted by my concerns about the conglomerate operating companies. But, those companies are significant and I believe there will be rapid turnover at the executive level and sub par performance under a new regime. Overall performance will be retarded as the new Berkshire management divests itself of many subsidiaries. In the meantime, Wall Street gets confused or disillusioned and the share price comes under pressure.

Without Warren, Berkshire will be under share price pressure until it slims down to an insurance holding company with significant utility and industrial concentrations. I sold my position earlier this year and while that decision looks good today, I probably sold too soon, as Warren undoubtedly remains healthy, wise, and in control for years to come. But when that time does come, his billionaire subsidiary presidents won’t like the new regime.

1 comment:

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