Author Topic: What would you do.....  (Read 6224 times)

Zorrofan

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What would you do.....
« on: December 11, 2017, 10:46:08 AM »
fareastwarriors posted this on the general news thread but it made me wonder how many will stay "loyal" to BRK after WEB & CM are no longer in charge?  I will vote against any breakup, forgoing short-term gain for the long-term profit I believe BRK will continue to generate. What are your thoughts?

"After Decades of Hints, Buffett’s Heir May Now Be More Apparent

 The pressure to dismantle Berkshire will mount. The bulwark against that impulse is his successor, whose identity is one of the business world’s best-kept secrets.


https://www.bloomberg.com/news/articles/2017-12-07/after-decades-of-hints-buffett-s-heir-may-now-be-more-apparent"


cheers
Zorro


StubbleJumper

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Re: What would you do.....
« Reply #1 on: December 11, 2017, 11:33:00 AM »
I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes.

As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc).  With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his.  To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually.  So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders.

What about the next guy?  Or more likely the second or third guy after WEB?  Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO.  With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves.  It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company.  Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. 

When the CEOs and management teams of the subsidiaries sees this, how will they react?  WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs.  But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. 

To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie.  Larger because of the ridiculous annual cashflows and the stupendous market cap.  Incorrigible because there's no legitimate threat of a takeover.  The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up.  But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder.

Nope, my sense is that we will probably get lucky with the next guy and we'll get good management.  But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management.  Enjoy current management while it lasts -- it's too good to be true!



SJ

Jurgis

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Re: What would you do.....
« Reply #2 on: December 11, 2017, 11:59:40 AM »
Can I get an option "I don't care"?

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.
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Zorrofan

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Re: What would you do.....
« Reply #3 on: December 11, 2017, 01:48:59 PM »
I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes.

As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc).  With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his.  To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually.  So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders.

What about the next guy?  Or more likely the second or third guy after WEB?  Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO.  With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves.  It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company.  Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. 

When the CEOs and management teams of the subsidiaries sees this, how will they react?  WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs.  But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. 

To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie.  Larger because of the ridiculous annual cashflows and the stupendous market cap.  Incorrigible because there's no legitimate threat of a takeover.  The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up.  But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder.

Nope, my sense is that we will probably get lucky with the next guy and we'll get good management.  But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management.  Enjoy current management while it lasts -- it's too good to be true!



SJ

Sadly, you raise some good points. My original hope had been that the Gates Foundation would hold on to the shares WEB donated and through their own self-interest replace WEB as our guard against all the potential issues you raised.  I thought that a small dividend paid out after WEB & CM are gone would generate enough cash to meet the charity's IRS requirements. However it appears they are just going to sell the shares.

Jurgis

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Re: What would you do.....
« Reply #4 on: December 11, 2017, 02:09:13 PM »
My original hope had been that the Gates Foundation would hold on to the shares WEB donated and through their own self-interest replace WEB as our guard against all the potential issues you raised... However it appears they are just going to sell the shares.

I'm pretty sure Gates foundation is not set up as perpetual foundation and/or Buffett's donation is not intended as perpetual contribution. Pretty sure there are conditions that the money to be used within certain timeframe, so yes, they have to sell the shares.

I don't remember the source, so you might have to hunt for it if you want confirmation. (Or maybe someone on CoBF will confirm or contradict the above).
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globalfinancepartners

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Re: What would you do.....
« Reply #5 on: December 11, 2017, 02:18:08 PM »
The gates foundation is required to sell shares. They have been selling them much slower than would be required, as they have received some accommodation - but they are still required to sell and Warren was aware of the rules governing “excess business holdings” or whatever it’s called. Basically you can’t concentrate a foundation in a single stock so that foundations aren’t used to control companies (obviously abroad the rules are different, ikea etc..)

John Hjorth

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Re: What would you do.....
« Reply #6 on: December 11, 2017, 02:31:52 PM »
The source is the original donation letter from Mr. Buffett to the Gates Foundation, where the condition is mentioned as increased spending [charity activity ramp up] in the foundation. I suppose otherwise there would be tax consequenses for Mr. Buffett personally.
Quote
There are three conditions to this lifetime pledge. First, at least one of you must remain alive and active in the policy-setting and administration of BMG. Second, BMG (or any intermediary) must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes. And, finally, the value of my annual gift must be fully additive to the spending of at least 5% of the Foundation’s net assets. I expect there to be a ramp-up period of two years during which this condition will not apply. But beginning in calendar 2009, BMG’s annual giving must be at least equal to the value of my previous year’s gift plus 5% of BMG’s net assets. If this amount is exceeded in any year, however, the excess can be carried forward and be offset against a shortfall in subsequent years. Similarly a shortfall in a given year can be made up in the following year.
« Last Edit: December 11, 2017, 03:02:03 PM by John Hjorth »
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DooDiligence

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Re: What would you do.....
« Reply #7 on: December 11, 2017, 03:06:46 PM »
I wouldn't want to see a breakup / spinco event until after I fill up.

How about this though?

Are we agreed that Berkshire is not being valued today as a sum of the parts entity? (if not, then my premise breaks the rest of this post.)

What if everything except Geico & reinsurance was spun out in the most tax efficient manner possible and you have the option of rolling into the new entity like 1969? (prob have to keep See's too out of honor.)

I'd elect to own the new entity over MOST of the spinco's without hesitation!

You get the float.

Able, Jain, T & T get the privilege of starting the whole thing over again for another 2 or more generations!

---

A "Maybe" option should be added.
« Last Edit: December 11, 2017, 03:09:42 PM by DooDiligence »
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cubsfan

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Re: What would you do.....
« Reply #8 on: December 11, 2017, 03:15:06 PM »
I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners
who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going
to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns
new investors coming in - that that is the case.

Am I missing something here??

John Hjorth

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Re: What would you do.....
« Reply #9 on: December 11, 2017, 03:30:02 PM »
It's actually in the bull's eye!, cubsfan.

Earlier today, I was actually thinking about the hypothetical situation of new Berkshire CEO introducing a new version of the owners manual. How would that be received, if it contained material changes touched earlier in this topic by StubbleJumper?

Personally, I'm surprised by interim poll outcome so far. [Yes 9 - No 18 right now].

The breakup scenario actually playing out is a nightmare for me. I do not vote at the AGMs. The breakup scenario would make me go through that hassle.
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