2016: Will activists target Berkshire if it trades at a sharp discount to intrinsic value?
CAROL LOOMIS: In the conclusion of the book “Dear Chairman,” which you recommend in this year’s annual letter — a new book you recommend- the author argues that, quote, “The life’s work of great investors is inevitably reabsorbed into the industrial complex with little acknowledgement of their accomplishments.”
He then argues that Berkshire Hathaway will eventually be targeted by activist investors if it trades at too sharp a discount to intrinsic value.
Do you agree with this assessment and have you considered installing corporate defenses that might prevent future generations of activists from trying to break up Berkshire Hathaway?
WARREN BUFFETT: Yeah, I used to worry more about that than I do now.
Partly, size is one factor. I think the more important factor would be that Berkshire will always be in a position to repurchase very significant amounts of stock, and as long as it’s willing to buy that stock at some price — and it should be — close to intrinsic value, there should not be a large margin, in terms of anybody that might come along and think there’d be a lot money to be made by breaking up.
There would be money lost by breaking it up, in terms of we’d lose — there’d be certain advantages lost.
MidAmerican Energy could not have done what it has done in renewables without Berkshire being the parent. I mean, if it had been split off, it would have been worth — the parts would have been worth — less than the whole. And there are other instance — I could give you significant instances of that in other cases.
So, I don’t think there will be a spread that will be enticing to anyone. And beyond that, I think the numbers involved would be staggering, and I think we have a shareholder base that recognizes the advantages of both the Berkshire businesses and its culture and — so I think it’s very, very unlikely.
But there have been periods in business history where stocks sold at — where practically all stocks — sold at dramatic discounts from what you might call intrinsic value. And it’s interesting that very little activity occurred there.
In the 1974 period, 1973 and ’74, you know, there were company — really good companies — one of which was Cap Cities, for example, that Tom Murphy ran, that was selling at a huge discount to what it was worth. But people did not come along. And so, to some extent, when the discounts are huge, money is hard to get.
It’s not a huge worry with me. Actually, in my own case, because of the way my stock will get distributed to philanthropies after I die, it’s very likely that my estate, for some years, will be, by far, the largest shareholder of Berkshire, in terms of votes, even with this distribution policy that occurs.
So I — it’s not something I worry about now. I used to worry about it some, but it’s not a factor now.
CHARLIE MUNGER: Well I — I think we have almost no worries at all on this subject, and that most other people have a lot of thoroughly justifiable worry, and I think that helps us. So, I look forward on this subject with optimism.
WARREN BUFFETT: You want to explain how it helps us, Charlie?
CHARLIE MUNGER: Well, if you’re being attacked by people you regard as evil and destructive and so on, and you want a strong ally, how many people would you pick in preference to Berkshire?
WARREN BUFFETT: My name is Warren Buffett and I approve of that message. (Laughter)