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

[villainx]

Thank you for the PSR feedback!

 

 

[DooDiligence]

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.

 

Tracking stock, ala Malone?

Doesn't really fit the profile & I'm largely ignorant of such issues.

[RVP]

In a world of abundant capital and VCs willing to tolerate years and years of losses, I think having everything under one roof is not only a big advantage, but increasingly a necessity.

 

Yes spinning off divisions can allow you to be more focused & efficient, but in an upside down world where growth is all that matters and near/mid-term profitability is an after-thought, you need a very big bank account to endure/adapt to the uneconomic competition and disruption. A lot of Berkshire's non-monopolistic/ non-regulated subsidiaries may be mortally wounded going it alone.

[bizaro86]

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.

 

It seems reasonable to me (as an admitted outsider) that trains would run on a schedule. That's how most transportation (planes, busses, etc) works. Even pipeline deliveries are scheduled (batch lines) and they have continuous flow.

 

I agree that customers prefer extra flexibility, but there doesn't seem to be a lot of evidence that they're willing to pay for it.

 

And if the regulatory system changes it will likely change for all the Class 1 railroads at the same time. So BRK could conceivably get none of the margin benefits of PSR and all the regulatory downside.

[kab60]

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.

 

Tracking stock, ala Malone?

Doesn't really fit the profile & I'm largely ignorant of such issues.

Yeah, there are definately lots of ways to surface value here, but he's not really playing that game, and I prefer it that way. Either way I think massive buybacks, even at fair value, is the way forward. The old man can't really defend hording more cash, and it's difficult if not impossible for him to find better risk/reward elsewhere.

[LC]

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.

 

Tracking stock, ala Malone?

Doesn't really fit the profile & I'm largely ignorant of such issues.

Yeah, there are definately lots of ways to surface value here, but he's not really playing that game, and I prefer it that way. Either way I think massive buybacks, even at fair value, is the way forward. The old man can't really defend hording more cash, and it's difficult if not impossible for him to find better risk/reward elsewhere.

 

I agree. Particularly on the "old man" comment. I am curious to hear what additional responsibilities have been migrated to the senior mgmt team (Greg et al) over the year (this year in particular, given all the COVID uncertainty).

[DooDiligence]

Thanks to all for tolerating my idiotic idea.

At least the question brought up some interesting info & perspectives.

edit: Also thanks to Ander for starting the discussion to begin with.

 

Does anyone know if WEB & Chuck read CoBF?

How can they not?

 

edit: Someone should ask at the next (virtual) AGM.

[ander]

Thanks to all for tolerating my idiotic idea.

At least the question brought up some interesting info & perspectives.

edit: Also thanks to Ander for starting the discussion to begin with.

 

Does anyone know if WEB & Chuck read CoBF?

How can they not?

 

edit: Someone should ask at the next (virtual) AGM.

 

Thanks to everyone for the feedback and comments.

 

I'm still in favor of the split (either 2 or 3 - in 3 you'd have to get a 3rd allocator) since you have 2 capital allocators (Ted and Todd), which would allow for at least 2 smaller Berkshires. I do believe it would create additional value. Arguments against have included: no incremental value created (I believe in smaller size even at 1/2 helps), not a permanent home for cos selling (they would still be a part of Berkshire Hathaway 1 or 2 or 3 (though 3 i would envision be cash only), not be able to reallocate capital (they would as cash is generated a capital allocator can re-allocate, except they have less businesses to choose from, but on the other hand plenty of businesses just as Buffett did 20 years ago).

[ValueMaven]

If Warren thought BERK was cheap enough at $215 back in Sept - I wonder what he thinks now (re: buybacks) at $225 given all of the improvements around the vaccine etc.  September was the single biggest month in terms of backbacks ever.  Food for thought.

[boilermaker75]

Thanks to all for tolerating my idiotic idea.

At least the question brought up some interesting info & perspectives.

edit: Also thanks to Ander for starting the discussion to begin with.

 

Does anyone know if WEB & Chuck read CoBF?

How can they not?

 

edit: Someone should ask at the next (virtual) AGM.

 

How could they resist the politics section?

[TREVNI]

Thanks to all for tolerating my idiotic idea.

At least the question brought up some interesting info & perspectives.

edit: Also thanks to Ander for starting the discussion to begin with.

 

Does anyone know if WEB & Chuck read CoBF?

How can they not?

 

edit: Someone should ask at the next (virtual) AGM.

 

Thanks to everyone for the feedback and comments.

 

I'm still in favor of the split (either 2 or 3 - in 3 you'd have to get a 3rd allocator) since you have 2 capital allocators (Ted and Todd), which would allow for at least 2 smaller Berkshires. I do believe it would create additional value. Arguments against have included: no incremental value created (I believe in smaller size even at 1/2 helps), not a permanent home for cos selling (they would still be a part of Berkshire Hathaway 1 or 2 or 3 (though 3 i would envision be cash only), not be able to reallocate capital (they would as cash is generated a capital allocator can re-allocate, except they have less businesses to choose from, but on the other hand plenty of businesses just as Buffett did 20 years ago).

 

Help us understand your logic for splitting it up. What specifically would BRK gain access to that it doesn't already have? The operating subs can take advantage of smaller acquisitions as bolt-ons. Berkshire wouldn't magically gain access to a new subset of opportunities because it was half the size. The subs are operated in a decentralized manner already. It's almost as if they're still investments vs. wholly-owned subsidiaries. In other words, Berkshire takes a portfolio approach.

 

Berkshire is really a collection of businesses, not one large business. Say you take GEICO, BHE, and BNSF and put them into a BRK#2. Now the other businesses are "smaller" - what have you gained?

[bizaro86]

You would probably save on overhead. I know they are always saying they have some absurdly low number of employees at hq, but there are tons of corporate employees not at hq who do things like generate consolidated financials and tax returns.

 

Maybe the savings don't outweigh the benefits of 1 tax return and less public company costs though  not sure.

 

I think eventually it will get broken up, because it will become too unwieldy to manage.

[TREVNI]

You would probably save on overhead. I know they are always saying they have some absurdly low number of employees at hq, but there are tons of corporate employees not at hq who do things like generate consolidated financials and tax returns.

 

Maybe the savings don't outweigh the benefits of 1 tax return and less public company costs though  not sure.

 

I think eventually it will get broken up, because it will become too unwieldy to manage.

 

You're making an assumption about the "tons of corporate employees" producing accounting reports. The quarterly reports are prepared at headquarters - I heard that directly from someone in accounting at HQ. Berkshire doesn't produce monthly consolidated financials.

 

The subsidiary financials would remain and still have to be prepared. You'd have 1 & 1, but they'd still add up to 2. No change in costs. Same with the tax return: two smaller piles adding up to the same size as before.

[bizaro86]

You would probably save on overhead. I know they are always saying they have some absurdly low number of employees at hq, but there are tons of corporate employees not at hq who do things like generate consolidated financials and tax returns.

 

Maybe the savings don't outweigh the benefits of 1 tax return and less public company costs though  not sure.

 

I think eventually it will get broken up, because it will become too unwieldy to manage.

 

You're making an assumption about the "tons of corporate employees" producing accounting reports. The quarterly reports are prepared at headquarters - I heard that directly from someone in accounting at HQ. Berkshire doesn't produce monthly consolidated financials.

 

The subsidiary financials would remain and still have to be prepared. You'd have 1 & 1, but they'd still add up to 2. No change in costs. Same with the tax return: two smaller piles adding up to the same size as before.

 

It seems improbable to me that the 20 some odd people at HQ can consolidate that many different subsidiary financials on a quarterly basis, and file the consolidated tax return. Plus I'm pretty sure I've seen job ads for a corporate office elsewhere in Omaha. Not "HQ" obviously, but people doing corporate functions. Maybe I'm wrong, and I don't think its that important anyway.

 

This won't get broken up or kept together for G&A savings. It will get broken up when the discount to the sum-of-the-parts value gets too large for shareholders to justify keeping it together. Almost certainly after WEB has passed away. At some point the market won't like management, and will wonder why it makes sense to keep these disparate businesses together.

 

Because WEB's shares are getting converted to B shares and sold that will leave Munger's estate beneficiaries with a great deal of voting power, so they will control the timeline here to a certain degree. But I think there will be significant spin-offs/break-up of BRK within the next say 30-40 years.

 

 

[gfp]

I don't think Munger's heirs (the "Munger Clan" lol) will have a meaningful voting stake in Berkshire.  I understand that much of Munger's shares were A shares and thus more potent but he never had enough shares to be a big voting influence, especially after many donations over the years (which continue and are likely at his death).

[bizaro86]

I don't think Munger's heirs (the "Munger Clan" lol) will have a meaningful voting stake in Berkshire.  I understand that much of Munger's shares were A shares and thus more potent but he never had enough shares to be a big voting influence, especially after many donations over the years (which continue and are likely at his death).

 

Fair enough. Are there any other large holders of the A? After WEB's shares all get converted to Bs and sold it seems like there could be a bit of a power vacuum. And I think the one-time gains from the split would be pretty attractive.

[MarioP]

From the proxy :

 

Warren E. Buffett, whose address is 3555 Farnam Street, Omaha, NE 68131, is a nominee for director and the only person known to the Corporation to be the beneficial owner of more than 5% of the Corporation’s Class A Stock.

[TREVNI]

I don't think Munger's heirs (the "Munger Clan" lol) will have a meaningful voting stake in Berkshire.  I understand that much of Munger's shares were A shares and thus more potent but he never had enough shares to be a big voting influence, especially after many donations over the years (which continue and are likely at his death).

 

Fair enough. Are there any other large holders of the A? After WEB's shares all get converted to Bs and sold it seems like there could be a bit of a power vacuum. And I think the one-time gains from the split would be pretty attractive.

 

Another group worth remembering is what Lawrence Cunningham calls Quality Shareholders. There are a lot of large institutions with significant holdings that will probably be called on to weigh in on decisions in the future. Even if they approve of continuing as is, which is likely to be the case, there will be more calls for them to bless the actions of management once present management has passed the baton.

 

I suspect there won't be any real threat to breaking up Berkshire for the first 10-15 years, maybe longer.

 

 

 

[gfp]

I think that between the share repurchases, some from the estates of long-time holders, and deals like the $1.2 Billion of A shares from the Ueltschi estate (flightSafety), and the one-way conversion to get liquidity and gift flexibility there will be very few A shares that remain over time.  When an A share is repurchased or converted to Bs it is gone forever.  Buffett has shown an interest in repurchasing A shares despite the illiquidity.  I think long term he envisions more of a single voting class.  By that point the company will be too big for voting rights to matter much to an activist.  If someone wants to influence Berkshire 10 years or more from now they are going to have to win hearts and minds, not accumulate a meaningful voting block themselves.

 

I don't think Munger's heirs (the "Munger Clan" lol) will have a meaningful voting stake in Berkshire.  I understand that much of Munger's shares were A shares and thus more potent but he never had enough shares to be a big voting influence, especially after many donations over the years (which continue and are likely at his death).

 

Fair enough. Are there any other large holders of the A? After WEB's shares all get converted to Bs and sold it seems like there could be a bit of a power vacuum. And I think the one-time gains from the split would be pretty attractive.

[IceCreamMan]

Thanks to all for tolerating my idiotic idea.

At least the question brought up some interesting info & perspectives.

edit: Also thanks to Ander for starting the discussion to begin with.

 

Does anyone know if WEB & Chuck read CoBF?

How can they not?

 

edit: Someone should ask at the next (virtual) AGM.

 

How could they resist the politics section?

 

Which handles do you think they're using to post in the politics section?

[DooDiligence]

Thanks to all for tolerating my idiotic idea.

At least the question brought up some interesting info & perspectives.

edit: Also thanks to Ander for starting the discussion to begin with.

 

Does anyone know if WEB & Chuck read CoBF?

How can they not?

 

edit: Someone should ask at the next (virtual) AGM.

 

How could they resist the politics section?

 

Which handles do you think they're using to post in the politics section?

 

??? derp