Is it time to break up Berkshire Hathaway? A November 14, 2015, opinion piece in Barron’s by retired analyst Thornton Oglove asserts that it is.
In Oglove’s view, Berkshire’s companies are undervalued in its current mega-conglomerate structure and would be worth more spun-off as individual dividend-paying companies.
I beg to differ.
Twelve Big Reasons Berkshire is Stronger Together than Broken Up
1. Berkshire’s not your typical conglomerate. Back in the 1960s, conglomerates got a bad name because weak companies were tied together in the hopes that the combined assets would be overvalued by investors. Unfortunately, as with all things overvalued, prices eventually decline. With Berkshire, you have quality assets that continue to grow in value. What is the value of BNSF Railway today, for example, as compared to when it was acquired in 2009? Not only is it worth significantly more, but only five years after it was acquired, Berkshire had already recouped 100% of the cash it had spent in the acquisition.
2. Berkshire’s greatest strength is its ability to move capital tax free across industries. Under its current structure Berkshire can use its profits from one of its companies to meet the needs of another. Warren Buffett began this practice long ago, and it is why, for example, you don’t find a See’s Candies in every mall. He recognized that See’s profits were better spent invested in other companies in other sectors rather than in building a candy empire.
3. Berkshire can use capital much more effectively for acquisitions than you or I can. In the past year, Berkshire has helped fund the $12.5 billion merger between Burger King and Tim Hortons, gaining among other things a 4.8% stake at a penny a share; merged H.J. Heinz with Kraft Foods in order to form the third-largest food and beverage company in North America (picking up a nice a $4 billion gain in the process); and is now on the cusp of acquiring Precision Castparts in a $42 billion deal that will bring into the fold a major aerospace manufacturer just as demand for commercial airlines is expected to double over the next 15 years. These deals, and a number of other smaller ones, demonstrate that just as a tidal wave of water is infinitely more powerful than a lot people sitting at home filling their teacups, a tidal wave of money is far more powerful than a lot of individual dollars sitting in your bank accounts.
4. Berkshire’s philosophy is one of the reasons its companies are worth so much. Most companies have one eye on the calendar every 90 days as they sweat out the latest quarterly earnings report. Not Berkshire’s companies. Warren Buffett wants his managers making their decisions based what is good for the long term, and he couldn’t care less about appeasing those obsessed with quarterly earnings. This makes a huge difference at capital-intensive companies such as BNSF Railway, which are freed up to make the kinds of capital investments that bring great returns down the line even if they hurt short term earnings. The same goes on the insurance side, where Buffett has never been a fan of excessive underwriting that boosts premiums on the short term, but risks big losses down the road.
5. Berkshire’s diversity is one of its great strengths. Gone are the days when Berkshire was an insurance company above all else. Today’s Berkshire is tremendously diversified with everything from insurance, utilities, and clothing manufacturing, to a leading freight railroad under its umbrella. Investing in Berkshire means weakness in a given sector won’t torpedo your investment.
6. Berkshire provides a great home for companies looking to sell. Got a billion-dollar company that you want to sell? Berkshire could be the perfect home for you. If you’ve founded a company in your garage and watched it grow into a five-billion-dollar company, do you want to sell it to a private equity firm now that you are ready to retire? If you do, the management is likely to be dumped and it’s the company broken up into pieces and sold off. Not with Berkshire, and that’s why companies such as ISCAR Metalworking approach Berkshire about being acquired.
7. Berkshire’s loyalty attracts quality assets. Not every company Berkshire has acquired over the years has worked out, yet Berkshire doesn’t sell off the losers. Why? Because the promise that once you become part of the Berkshire family you stay part of the Berkshire family helps attract quality companies. So if Berkshire has to carry a few underperformers in order to attract quality assets, that loyalty pays off over and over again.
8. Are you as patient as Berkshire? Berkshire is not afraid to sit on its money waiting for opportunity. When the economy collapsed in 2009, Berkshire’s huge cash position allowed it to make extraordinary deals with cash-strapped Bank of America, Goldman Sachs, and others. The Wall Street Journal calculated a 40 percent return on those blue chip investments. Berkshire was also able to acquire quality assets, such as RV-maker Coachman, for a song when they ran into cash-flow problems.
9. Berkshire’s stock portfolio is better than a mutual fund. While Berkshire’s $100 billion-plus portfolio of blue chip stocks, including Coca-Cola, IBM, Walmart, and Wells Fargo, among others, may or may not outperform the broader market in a given year, don’t make the mistake of thinking it is just a mutual fund wrapped in a conglomerate. Berkshire’s portfolio offers an opportunity to put its cash to work and still liquidate stock positions in ways no mutual fund or ETF can. Just look at this summer’s tax-free swap of billions in appreciated Procter & Gamble stock for P&G’s Duracell division, and its recent tax-free swap of Phillips 66 stock for the company’s specialty chemicals division as just two examples of Berkshire leveraging its portfolio.
10. Berkshire expands the capabilities of its existing companies. Unlike conglomerates that are always acquiring assets only to starve them of the resources that can make them flourish, Berkshire helps its companies grow. Buffett is a big believer in the bolt-on acquisition that adds new capabilities to Berkshire’s existing companies. Many of these acquisitions don’t get much media play, but they continually make Berkshire’s existing companies stronger. For example, Berkshire’s billion-dollar acquisition of Cornelius made the Marmon Group the world leader in beverage dispensing, Lubrizol added Weatherford International’s global oilfield chemicals business, and MiTek Industries added M&M Manufacturing, one of the country’s largest producers of sheet metal products.
11. Berkshire makes its constituent companies stronger and less failure prone. Not only was Berkshire able to scoop up bargains during the Great Recession, but it was also able to ensure the survival of its companies during a time when many companies were filing for bankruptcy protection. Berkshire’s strength and diversity enabled its manufacturing and service companies to survive a financial downturn that wiped out similar companies that had to go it alone.
12. Berkshire allows you to invest like Warren Buffett. Unlike most conglomerates that pay millions to a CEO who may end up using a golden parachute at your expense in a few years, Berkshire’s CEO only earns $100,000 a year. Yes, you got that right, it’s not missing a few zeros. As an investor in Berkshire, you are growing your wealth on the same basis as Buffett, through the appreciation of the stock price. What’s more, he’s doing all the work. Try and find a hedge fund or mutual fund run on the same basis.
Deconglomerate? Not on Your Life!
It’s true that Berkshire will never again experience the explosive growth that it did in its first few decades, but don’t think that with all its diversity it’s the “ponderous” entity that Thornton Oglove claims it is. Warren Buffett’s pretty darn smart and has created an outstanding combination of safety and earning power that will carry on long after he is gone. You just have to look at Berkshire’s outstanding track record of acquisitions over the past six years to prove that its best years are not a distant memory, and that’s more than enough reason to resist the siren call to “deconglomerate.”
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.