Berkshire Hathaway's Board of Directors believes a 50-for-1 split of the company's B shares is advisable regardless of whether the deal to buy Burlington Northern Santa Fe Corp. goes through, according to an SEC filing yesterday.
Berkshire's SEC filing states that: "the Corporation’s Board of Directors believes that the split is advisable regardless of the BNSF transaction, and thus the Class B stock split is not contingent on the closing of the BNSF acquisition and, if approved by our shareholders, is expected to be effective prior to the date of such closing."
This is an interesting revelation. Warren Buffett has said the stock was being split so people owning small stakes in BNI could choose to get Berkshire B shares as part of a tax-free transaction. The SEC filing suggests that Berkshire wanted to split the B shares anyway. The A shares aren't being split.
The split, if done today, would take Berkshire B shares from about $3,450 per share to about $69 per share. This makes the stock more accessible to the small-potatoes investor, adds trading volume and makes it more likely that the stock will be added to the S&P 500. That will force index funds to buy the stock, creating a steady flow of demand. It makes Berkshire a more mainstream stock and seems to be a step toward the post-Buffett era.
Here is what Buffett biographer Alice Schroeder had to say about the split in a recent Bloomberg column regarding the BNSF deal:
A final motive I am confident about is that Buffett finally has a plausible excuse to split Berkshire’s B shares. He has spilled a lot of ink over the years decrying stock splits. A 50- to-1 ratio isn’t a stock split, it is a mincing. Why do it? Buffett has just given Standard & Poor’s the ticket it needs to add Berkshire to the S&P 500 Index at a time when S&P is desperate for large, solvent, high-quality companies to replace the casualties of last year’s carnage. It is high time for Standard & Poor’s to do this, but the stock’s liquidity has always been the sticking point. Buffett would never admit to wanting Berkshire to join the S&P, but becoming an acknowledged peer to other major companies is part of the path to his legacy.
Berkshire will hold a special shareholders meeting in January to vote on the stock split and a few related matters, according to the SEC filing. An exact date wasn't given. The vote should just be a formality, as Buffett has already said he'll be voting for the change, and he controls 31.6 percent of the voting power. Other shareholders will follow.
In addition to approving the stock split, Berkshire shareholders will be authorizing the company to increase the number of B shares issued from 55 million to 3.225 billion. This will account for the 50-to-1 split and create enough B shares for each A share to be converted.
Of course all A shares won't be converted to B shares, but it's gradually happening, thanks mostly to Buffett's annual donations to the Bill & Melinda Gates Foundation and the foundations of his late wife and children. Buffett's A shares are slowly being converted to B shares as part of the donations.
The conversion rate will now be 1,500 B shares for every one A share (A shares can be converted to B shares but not vice-versa). Each B share will have one-ten-thousandth (1/10,000th) the voting power of an A share, which is again proportional to the current 1/200th ratio.
Only shareholders who own Berkshire stock as of the close of business Nov. 30 will be able to vote at the special shareholders meeting in January. Most of the votes will likely be done by proxy, and people who don't return the materials will be counted as voting in favor of the recommendations.
The Burlington deal, through which Berkshire will buy the $26 billion in BNI stock that it doesn't already own, is expected to close in the first quarter sometime after the special shareholders meeting. Berkshire is expected to finance the deal by issuing about $10 billion worth of stock, paying $8 billion in cash on its own books and paying another $8 billion in cash borrowed from Wells Fargo and J.P. Morgan Chase on favorable terms.
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