But in reality, Buffett is more than willing to improv if it makes sense for Berkshire shareholders. Today's news that Berkshire's "B" shares will be split 50-to-1 is one example.
Anyone who closely follows Buffett has read that he doesn't believe in stock splits, because all it is doing is cutting one pie into more pieces. The amount of pie, however, remains the same. Buffett wants shareholders who aren't going to get excited about having 200 shares at $20 rather than 100 shares at $40.
Buffett reiterated today to CNBC that he's not much for stock splits. And the "A" shares won't be split as part of the deal to buy Burlington Northern Santa Fe Corp. An "A" share, which had been worth 30 times a B share, will now be worth 1,500 times.
But he was willing to split the B shares (assuming Berkshire shareholders approve, which seems about as safe a bet as death and taxes) to make the deal work. The split will allow smaller BNI shareholders to receive Berkshire B shares if they choose, which will make the transaction tax-free for them.
Buffett has also said that he doesn't like using Berkshire stock to pay for a deal. But again, he's doing it this time to make the deal work for the company.
Assuming Berkshire sticks to the 60 percent cash, 40 percent stock method outlined earlier today to buy the remaining 77.4 percent of BNSF it doesn't already own, the company will use about $10.6 billion in stock and $15.8 billion in cash. Berkshire will use about $8 billion in cash from its balance sheet, and borrow $8 billion more from a bank to be repaid over three annual installments.
That method will leave Berkshire with $20 billion in cash, Buffett told CNBC today. That's enough to cover its insurance obligations and still keep the company in the game for acquisitions (albeit smaller ones than the one announced today).
Had Berkshire not used the $10.6 billion in stock to finance the deal, it wouldn't have been able to offer the tax-free benefit to BNI shareholders, and it would have left the company either less flexible going forward or more in debt to the bank.
In other words, Buffett was willing to set aside his preference not to use stock to make it a better deal for his shareholders.
One final example of Buffett's willingness to divert from the famous script: In his 2002 letter to shareholders Buffett called derivatives "weapons of mass destruction," yet later made a $5 billion derivative bet on the long-term health of world stock markets. Again, he deviated when he calculated that doing so made sense for Berkshire shareholders.
So go ahead and learn Buffett's famous rules and pithy quotes, which are so omnipresent in media articles and blogs. Just don't believe that he won't break them if it makes sense to do so.
Disclosure: Long BRKB and BNI.
William Freehling, who owns Berkshire Hathaway "B" shares, is a business writer for a newspaper in Virginia. He closely follows the moves made by Warren Buffett and his company. He has read widely on Buffett and the billionaire's beliefs on value investing. Bill can be contacted at freehling@hotmail.com
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User Comments:
1. Hschacht says on Nov 03, 2009 at 9:17 PM:
Flexibility? Or hypocrisy?
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2. Billspetrino says on Nov 04, 2009 at 12:18 AM:
Lets make something clear about derivatives and WEbs analysis of them
as much as i like my "fellow" Bill let me interject a few things here
1) Web does not like the counter party risk in most contracts,in the big bet WEB made he got all the MONEY upfront
2) Web also WROTE the massive contract taht was mentioned in the example above,he did not have to put up ANY collateral and was not faced by getting any kind of"margin" call. The most he could lose is about 30 billion if all teh stock markets involved were ZERO, which is unlikely to say the least..
Web can be hyopcritcal though
1) he wants everyone to pay the estate tax but wisely will escape it by giving to his kids and gates charities
2) he says he doesnt like tobacco but he made amint on RJR stock and the bonds in the 1980s and i dont remember him giving the profits to charity
3) he also made akilling on Bud ( he wasnt the only one hahaha thanks WEB) and I mean is beer ok but cigarettes are so much worse?
Bottom line is the guy ahypocrite?sure.All of us have faults. But he is the only man to make over 100 billion dollars investing and I for one would not have achieved finnacial independence without his wisdom.peace
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3. Buffetteer17 says on Nov 06, 2009 at 7:30 PM:
Today's closing prices.
BRK/B = $3425
BRK/A div 30 = $3413
Buffett will exchange an A share for 30 B shares on request.
Obvious arbitrage but the spread is still too small, only 0.3%.
Will the spread increase enough to make this worth doing?
Not yet, BRK/A bid/ask 102400/10277, div 30 is 3413/3426.
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