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Opinion: Berkshire Hathaway after Buffett: Who will be the CEO, what else will change – and what won’t

The passage of time ensures that one day Berkshire Hathaway won’t have a man synonymous with creating one of the world’s most valued and admired businesses.

While managing the junior level of Berkshire Hathaway’s BRK.A BRK.B Decentralized personal business units will continue to be unchanged, filling Warren Buffett’s shoes will need some changes.

His most important role will be CEO, one of three jobs currently held by Buffett (he is also chairman and chief investment officer). While his real name remains a secret, Greg Abel’s background and skill set indicate that the board will choose him.

The main reason is that Abel has extensive experience in capital allocation. During his tenure at Berkshire Hathaway Energy, and later vice president overseeing non-insurance operations, Abel oversaw several acquisitions. He also feels much more comfortable and is around 10 years younger than Ajit Jain, vice president of insurance operations, which should give him a longer time in office. In contrast, Jain is a stellar henchman, more comfortable with insurance risk assessment (though he’s also one of the best executives in the world, having overseen his acquisitions). self).

The role of chairman will likely belong to Howard, son of Buffett, whose primary job is to ensure that Berkshire’s culture remains intact. Berkshire’s portfolio management responsibilities will go to Todd Combs and Ted Weschler, who joined Berkshire in 2010 and 2011 respectively.

The integration of changes in the C-suite is an important question regarding Berkshire’s future capital allocation.

Berkshire’s monetization is everything but guarantees that they will have enough cash to invest in valuable projects at the subsidiary level and ample cash to make potential acquisitions. . That means the cash will need to be returned to shareholders.

Here Berkshire has two main options and a third blend option.

The fastest way to payback shareholders is through dividends. But dividends are tax ineffective and impose a single standard on all shareholders, two reasons why Buffett has resisted paying a standard in the past. A better way is through repurchases of stocks, assuming they are executed at a price lower than intrinsic value, instantly increasing the value per share for the remaining shareholders. However, repurchase of stocks depends on price.

Berkshire’s next generation of leaders will likely hear loud calls from Wall Street (and perhaps a handful of shareholders) to part with Buffett.

This leaves a mix option as the most sensible course of action. Berkshire can place a regular dividend equal to 25% of normal operating income. Thereafter, if the stock repurchase is not available or the buyback does not materialize, the occasional special dividend may be announced.

A dividend for the rest of Buffett’s time would be unlikely if a stock buyback is still an option. But maybe soon, when Berkshire simply cannot allocate all of the capital it generates and will need to pay dividends. Longtime shareholders will recognize the need for such a policy change, and others will rejoice at the prospect of Berkshire as a dividend stock.

What the company’s new leaders are unlikely to do is break up with Berkshire Hathaway. More than any other corporation, this company is more than just the sum of its divisions. The Group achieves tax efficiency, diversification and capital allocation. Removing Berkshire to “unlock” value through a higher price income multiple destroys these advantages and incurs unnecessary taxes. Most importantly, it will tarnish the reputation that Berkshire has carefully nurtured as a permanent home for family businesses for generations.

Buffett put it succinctly in Presidential Letter 2018, announced in 2019: “Really good businesses are hard to find. Selling anything you are lucky enough to own doesn’t make any sense. “

However, the next generation of Berkshire leaders will likely hear big calls from Wall Street (and perhaps some shareholders) to part with Buffett. The crux of the Berkshire breakup is on what constitutes value.

Harriman House

Berkshire is built on the notion that value – the sum of all future cash flows discounted to the present – does not depend on the stock market’s assessment of that value. The underlying cash flow of many of Berkshire’s subsidiaries will not change when split into parts (in fact, they may be lower in terms of duplication costs), meaning their value will not increase. after breaking up. Subsidiaries have taken advantage of organic investment opportunities and quick acquisitions, and Berkshire has solved the problem of reinvestment by allowing excess money to be deposited back to headquarters.

Instead, Berkshire’s future value creation will likely come by minimizing downsides (maintaining underwriting underwriting and against trivial capital allocation moves) to allow accumulation and accumulation of occasional but meaningful benefits for the benefit of active shareholders.

Value can be created by the price difference over time (long-term business owners in the market often have short-term thinking), being the permanent home for family businesses (private market discount) , by acting as an alternative source of finance when credit markets are exhausted (as Buffett did during the financial crisis when he invested $ 14.5 billion over three days in Goldman Sachs, Wrigley and General). Electric), and through the opportunity stock repurchase.

Of course, the ultimate fate of Berkshire Hathaway rests with its shareholders. Berkshire will certainly not be the same in 25, 50, or 100 years, but it would have thrived without Warren Buffett because of the unique corporate culture he and Charlie Munger have cultivated for the past half century. .

It was probably the highest praise one could give to a man who took a white cloth and turned it into one of the most beautiful and most appreciated works of art ever. see.

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Adam J. Mead is CEO and Investment Manager of Capital Management Mead and the founder Invest in watch list. Follow him on Twitter @BRK_Student. This is adapted from “Berkshire Hathaway’s complete financial history: Warren Buffett’s financial analysis over time and Charlie Munger’s financial masterpiece.



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