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Daniel Sinclair
Daniel Sinclair

Don't be shocked about Buffett's Berkshire Split

November 05, 2009 | About:
On Monday, it was announced that the equity component of the consideration for the proposed acquisition of Burlington Northern Santa Fe Corporation (BNI) by Berkshire Hathaway (BRK-A, BRK-B) would be accompanied by a proposed 50-for-1 split of Berkshire's Class B Stock, which itself represents 1/30th of the Class B stock without voting rights.

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.

Rating: 3.7/5 (19 votes)


Dosorio71 - 6 years ago
Quick Question:

How does this 50-1 reverse split affect shareholders of Class A shares and if so , How will this reflect the overall book value of BKA?
Daniel.sinclair premium member - 6 years ago
Literally, the split affects Class A shareholders as they make them divisible into much smaller portions upon conversion which is useful for those wishing to sell little bits (such as for income in lieu of a dividend paying stock) rather than facing having to sell an entire share which they may not otherwise wish to do. Conversely, the fact that a potential investor doesn't have to face such a steep cost for exposure to Berkshire may prompt a whole class of investors to buy where they otherwise may not have been able or willing to do. As the article discusses, inclusion in the S&P 500 can be supportive of Berkshire's market value. While this will not impact Berkshire's book value itself, it may fundamentally alter what the market finds acceptable as a price-to-book value for the company going forward given greater liquidity of the stock and broader institutional ownership.
Daniel.sinclair premium member - 6 years ago
Thinking this through, looking at it through Soros' reflexivity lens, an upward revision of Berkshire's long term price-to-book ratio may in fact impact Berkshire's book value positively should it allow Berkshire to make further accretive purchases using a stronger stock. So, yes, it may also may reflect well on Berkshire's book value longer term.
Daniel.sinclair premium member - 6 years ago
Berkshire releases their Q3 09:$3.2 billion net income of, a $1.1 billion gain over last year.
Timper - 6 years ago

Mr. Sinclair has put forward en excellent argument and I applaude his insightfulness

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