Author Topic: Buffett buybacks: Could Berkshire tender stock?  (Read 87914 times)

John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #420 on: May 05, 2019, 05:56:19 AM »
With the annual meeting and associated interviews coming up, it would be extremely disappointing if someone didn't ask the obvious question of how exactly substantial repurchases of stock could be achieved in a reasonable timeframe and by exactly what means. WB is of course unlikely to answer directly, but the fact that no one has questioned him on the logistics of it yet is underwhelming to say the least.
So, the gist of the answers on the buyback questions thus far has been: the stock is/has been moderately undervalued, so we have bought some but we would buy way more if it was cheaper. Exactly how they would achieve those significantly more aggressive repurchases is still a big question mark, though.

Charlie seemed to express a more relaxed attitude towards repurchasing more at higher valuations, although that might be an overinterpretation from me.

I would hope that a tender question comes through, but we may have reached the fill on the buyback topic from the journos at this point, and I'm not putting my hopes on the audience for that.

After sleeping on observing the whole Berkshire AGM thing yesterday, I think this is a precise description of the issue at hand. Depending on how the markets evolve going forward, my overall perception is, that Berkshire will likely be a company sitting on a cash pile north of USD 100 B for a prolonged period going forward while growing at a certain clip its businesses - also depending on how in particular the US economy & the global economy in general evolves going forward.

Unfortunately, the specific tender question did not come up.
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longinvestor

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #421 on: May 05, 2019, 06:48:24 AM »
With the annual meeting and associated interviews coming up, it would be extremely disappointing if someone didn't ask the obvious question of how exactly substantial repurchases of stock could be achieved in a reasonable timeframe and by exactly what means. WB is of course unlikely to answer directly, but the fact that no one has questioned him on the logistics of it yet is underwhelming to say the least.
So, the gist of the answers on the buyback questions thus far has been: the stock is/has been moderately undervalued, so we have bought some but we would buy way more if it was cheaper. Exactly how they would achieve those significantly more aggressive repurchases is still a big question mark, though.

Charlie seemed to express a more relaxed attitude towards repurchasing more at higher valuations, although that might be an overinterpretation from me.

I would hope that a tender question comes through, but we may have reached the fill on the buyback topic from the journos at this point, and I'm not putting my hopes on the audience for that.

After sleeping on observing the whole Berkshire AGM thing yesterday, I think this is a precise description of the issue at hand. Depending on how the markets evolve going forward, my overall perception is, that Berkshire will likely be a company sitting on a cash pile north of USD 100 B for a prolonged period going forward while growing at a certain clip its businesses - also depending on how in particular the US economy & the global economy in general evolves going forward.

Unfortunately, the specific tender question did not come up.

Not sure about them always sitting on $100B for a long time. The options we heard yesterday included the potential 25% SEC limit, an insurance industry blow up of idiot capital, an elephant or two, “100B into Utilities “ and of course buybacks in Munger’s “We’ll be quite good when it is obvious”. Plus there could be more Occidental types in the future.

Besides all of the above someone asked if they should be parking their cash in low cost index funds instead of T-bills. That is not off the table for the next guy.

And then can always issue a dividend.

There’s no calamity in my mind. Berkshire’s price is well below value.

Munger kept repeating the theme that we have to endure their stubbornness. They are not about to change. The next guy could be way worse in other ways.
« Last Edit: May 05, 2019, 06:59:14 AM by longinvestor »

shalab

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #422 on: May 05, 2019, 09:37:40 AM »
I agree with Charlie that the buyback rules will be relaxed over time. It is obvious in Berkshire's case as well - where P/B kept moving up from 1.1, 1.2 and in an interview he said the buyback threshold may be close to 1.3. Then they bought back at 207 when P/B was more than 1.3. Essentially this helps inform the shareholders before they turn on the spigot.

Tender offer is highly unlikely for two reasons:
     - berkshire itself doesnt go into auctions when buying companies
     - he has said he doesn't want to take advantage of partners - mentioned it several times in the meeting yesterday

I am happy with 0.3% per quarter buy back rate or about 1% of outstanding shares per year. This can go up to 2-3% per year eventually. If berkshire deploys 100B to buybacks, it won't be Berkshire anymore that can take advantage of market downturns or buy other companies. As Buffett mentioned, a lot of people have invested a lot of cash in Berkshire as a fortress of value and he doesn't want to break that promise. I agree with that.

With the annual meeting and associated interviews coming up, it would be extremely disappointing if someone didn't ask the obvious question of how exactly substantial repurchases of stock could be achieved in a reasonable timeframe and by exactly what means. WB is of course unlikely to answer directly, but the fact that no one has questioned him on the logistics of it yet is underwhelming to say the least.
So, the gist of the answers on the buyback questions thus far has been: the stock is/has been moderately undervalued, so we have bought some but we would buy way more if it was cheaper. Exactly how they would achieve those significantly more aggressive repurchases is still a big question mark, though.

Charlie seemed to express a more relaxed attitude towards repurchasing more at higher valuations, although that might be an overinterpretation from me.

I would hope that a tender question comes through, but we may have reached the fill on the buyback topic from the journos at this point, and I'm not putting my hopes on the audience for that.

After sleeping on observing the whole Berkshire AGM thing yesterday, I think this is a precise description of the issue at hand. Depending on how the markets evolve going forward, my overall perception is, that Berkshire will likely be a company sitting on a cash pile north of USD 100 B for a prolonged period going forward while growing at a certain clip its businesses - also depending on how in particular the US economy & the global economy in general evolves going forward.

Unfortunately, the specific tender question did not come up.

longinvestor

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #423 on: May 05, 2019, 10:46:03 AM »
What matters most is the “conservatively calculated”. More so than the yardstick itself. The best question yesterday was the one about the four Grove method of valuation. It has been discussed around here, why not the insurance business? Buffett was not willing to be pinned down with a number on that.

How much?

alwaysinvert

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #424 on: May 05, 2019, 01:02:18 PM »
I absolutely fail to see how a tender offer would take more advantage of shareholders than open market buybacks. If anything, the terms and proceedings are way more upfront. I think the issue, if any, is precisely the opposite - it would be hard to get people to sell at a price that makes sense when they positively know that Buffett is on the other side of the trade. But there could be ways of framing it that would up the acceptance rate and still be honest, for example saying that we will not make another offer for x years and we will not pay a dividend so this is your only chance of a payout, etc.

My impression was that Buffett wanted to be somewhat vague on his plans for buybacks whereas Munger, to Buffett's chagrin, blurted out the honest truth - they will have to pay up more as time goes by. I'm not sure that he actually meant that BRK *didn't* trade at 60-70% of intrinsic value - that was more theoretical reasoning, i.e. saying that obviously we want to buy more if it's cheaper. If he actually has in mind that he will buy lots of stock only when it trades at levels for 170-180 or something of the sort, well, that will probably never happen except in cases where all other stocks fall way more and thus are more attractive. Or, possibly, when he dies.
« Last Edit: May 05, 2019, 01:03:50 PM by alwaysinvert »

CassiusKing1

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #425 on: May 06, 2019, 01:12:43 PM »
What are the rules around Buffett's stake that he's donating to the Gates foundation?  Can those shares be bought back in private transaction blocks?

james22

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #426 on: May 06, 2019, 08:06:01 PM »
Or, possibly, when he dies.

Yeah, don't understand why people fear the share price dropping with Buffett's death when BRK itself would be buying if it fell.
25% BRK l 25% BAM l 8% SV (VSIAX) l 8% EM (VEMAX) l 4% FNMA/FMCC l 4% FNMAS/FMCKJ l 25% Stable Value

alwaysinvert

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #427 on: May 22, 2019, 03:31:24 AM »
This is an observation from SwedishValue. 675 A-shares traded over the market between February 26 and 28 according to nyse.com. Despite that Berkshire bought back as many as 293 shares. Which raised the following questions:

1. Is the 25% of daily volume limit divided up on the different share classes or is it total traded volume in all common stock?*

2. Is there a rule that you have to report private transactions or has this only been a general assumption due to the last estate repurchase (when they also announced a higher buyback limit)? 

*The average purchase price level compared to the market prices on said dates seems to indicate that they could not feasibly have been bought over the market.

John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #428 on: May 22, 2019, 04:12:41 AM »
Cornell Law School - Legal Information Institute : 17 CFR § 240.10b-18 - Purchases of certain equity securities by the issuer and others.

Quote
(1)ADTV means the average daily trading volume reported for the security during the four calendar weeks preceding the week in which the Rule 10b-18 purchase is to be effected.

If one press on the embedded link "security", you get a pop-up with the legal definition of the word "security" in this context :

Quote
security
(5) The term security shall include any security defined as such pursuant to section 3(a)(10) of the Act, but shall exclude any class of security having a preference or priority over the issuer's common stock as to dividends, interest payments, redemption or payments in liquidation, if the voting rights of such securities only become effective as a result of specified events, not relating to an acquisition of the common stock of the issuer, which reasonably can be expected to jeopardize the issuer's financial ability to meet its payment obligations to the holders of that class of securities.

So, ref. alwaysinvert's question 1, I conclude ADTV is calculated based on total volume for the A and the B.

- - - o 0 o - - -

Edit:

Cornell Law School - Legal Information Institute : 17 CFR § 229.703 - Purchases of equity securities by the issuer and affiliated purchasers.

Please note:

Quote
... Instruction to paragraph (b)(1) of Item 703: Include in this column all issuer repurchases, including those made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs. Briefly disclose, by footnote to the table, the number of shares purchased other than through a publicly announced plan or program and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the company's obligations upon exercise of outstanding put options issued by the company, or other transactions). ...

and

Quote
... Instruction to Item 703: Disclose all purchases covered by this Item, including purchases that do not satisfy the conditions of the safe harbor of § 240.10b-18 of this chapter.
« Last Edit: May 22, 2019, 04:53:24 AM by John Hjorth »
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Dynamic

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #429 on: May 22, 2019, 05:04:47 AM »
They only need to follow Rule 10b-18 if they want to obtain the Safe Harbor protections that come with it, but it's voluntary and you can deviate from those guidelines if you don't need the safe harbor protections.

That link isn't fully comprehensive regarding what to do in the event of having two classes of shares, but the SEC's 10b-18 FAQ says that each class of shares must be treated separately. It also states that just because you exceed the trade outside of the safe harbor provisions, they will not assume that you are acting in a fraudulent or manipulating manner.

In the amended 10b-18 rules they state:
Quote
Although the safe harbor conditions are intended to offer issuers guidance when repurchasing their securities in the open market, Rule 10b-18 is not the exclusive means of making non-manipulative issuer repurchases. As the Rule states, there is no presumption that bids or purchases outside of the safe harbor violate Sections 9(a)(2) or 10(b) of the Exchange Act, or Rule 10b-5 under the Exchange Act. Given the widely varying characteristics in the market for the stock of different issuers, it is possible for issuer repurchases to be made outside of the safe harbor conditions and not be manipulative.

They detail the suggested amendments and the results of the consultation process, then outline the amendments they actually adopted:
Quote
d. Adopted amendments to the volume condition

After carefully considering the comments received, and upon thorough examination of current market practices and the underlying purposes of the safe harbor, we are adopting the proposed amendments relating to the volume condition's treatment of block purchases, with some modifications in response to comments received. Under the amended volume condition, to qualify for the safe harbor, an issuer's total volume of Rule 10b-18 purchases effected on any single day must not exceed 25% of the ADTV in its security, which includes any block-size purchases by or on behalf of the issuer for that day. Issuers, however, can include their block-size purchases when calculating its security's four-week ADTV.

In view of commenters' concerns that eliminating the block exception would negatively affect issuers with moderate or low average daily trading volumes that rely heavily on block purchases to implement their repurchase programs, we have decided to allow issuers to make (within the safe harbor) one block purchase per week, provided that the issuer does not make any other Rule 10b-18 purchases on that day. Thus, alternatively, once each week the issuer may purchase one block of its common stock in lieu of purchasing under the 25% volume limitation for that day. However, shares purchased by the issuer relying on this amended block exception may not be included when calculating a security's four-week ADTV under the Rule. This amended block exception is intended to provide issuers with moderate or low ADTV greater flexibility in carrying out their repurchase programs. However, this amended block exception does not include any amount of securities that a broker or dealer, acting as principal, has accumulated for the purpose of selling to the issuer, if the issuer knows or has reason to know that such amount was accumulated for such purpose.

We also wish to reiterate that Rule 10b-18 is not the exclusive means by which issuers and their affiliated purchasers may effect purchases of the issuer's stock without manipulating the market. In fact, the Commission has long recognized that there may be circumstances under which an issuer could effect repurchases outside the volume limitation without raising manipulative concerns, and indeed that failure to satisfy the conditions of the safe harbor does not give rise to any presumption that the activity is manipulative.

There had been a suggestion about allowing 500 share block trades even if they exceeded 25% of ADTV but I don't think this was adopted.

So, first the average volume (ADTV) is over 4 weeks preceding the purchase (or possibly preceding the Monday of the week in which the purchase took place - you'd have to dig into the references to be sure).

I think Berkshire will be careful not to be manipulating its own stock and to have evidence they are not in case of an investigation, even if they chose to deviate from 10b-18 provisions. They would be careful not to be deviate from rule 10b-18 safe harbor provisions if they're ever involved in any potential acquisition bids where they would pay partly in Berkshire stock and could be accused of inflating their stock to make their bid look more attractive.

There are also amendments allowing a certain amount of repurchasing during Off Hours Trading at lower of the primary market's closing price and the lowest bid in the Off Hours trading provided they don't make the first OHT purchase after the close.

There is scope to read the whole thing from the SEC, but I think we're clarifying the general picture and realising that Berkshire is quite at liberty to repurchase outside the scope of Rule 10b-18 so long as they do not act in any fashion that could be deemed to be stock manipulation or fraudulent activity if investigated by the SEC (in particular, activity aimed at artificially boosting the stock price above the fair value that would be arrived at by independent market participants. I'd imagine that buying at or below the independent bid and avoiding trading to near the open or close, would probably satisfy that.