Warren Buffett is famous for repeatedly being against stock splits and there has been some crowing about that in the press lately. But while Warren Buffett is didactic, he is not slavishly dogmatic. Except when it comes to money and maximising his financial position. So, is he contradicting himself or is he being a misunderstood genius again?
Ostensibly, the proposed split is to accommodate BNI shareholders with "even the smallest holdings". But there may be more. Buffett has bemoaned in the past of his using equity for acquisitions that proved dilutive because the Berkshire shares were undervalued, at least in relation to the target's share price.
So, what to do? He is doing two things. First, he is splitingt the B shares which would make each of those smaller shares cheaper and easier to trade. The result would make it more likely that the market for Berkshire's stock would be more liquid and thus qualify it for inclusion in the S&P 500 index. By being so qualified, many index and mutual funds would be forced to by Berkshire's stock and thus bidding up the stock. This issue has been covered, such as in Barron's Nov 5 2009 article, "Berkshire Hathaway in the S&P 500?".
But there is more. Think of the timing of the announced proposed takeover. It is right before Berkshire's Q3 results. And given Buffett's canny investments over the past year, the mountains of cash flow Berkshire is generating, the fact that the prices of stocks in Berkshire's portfolio of investments in public companies have increased overall, and misunderstandings about Berkshire's involvement in derivatives weighing on the stock, third quarter results might be quite noteworthy.
Putative CEO in waiting, David Sokol, CEO of Berkshire's MidAmerican Energy business, effectively said that we can expect as much when he recently declared on CNBC that the past 18 months may have been Buffett's most successful.
So, put together a likely rush on Berkshire's shares ahead of inclusion on the S&P 500 index and an upside surprise on Q3 results and you have an argument for a material run-up in Berkshire's shares right before they are used as consideration for the BNI acquisition.
Pretty canny. Warren, we love you.
The author owns shares in Berkshire Hathaway and Burlington Northern Santa Fe Corporation.