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Rupert Hargreaves
Rupert Hargreaves
Articles (1052)  | Author's Website |

Why Warren Buffett Decided to Launch Berkshire's B Shares

A look back at Buffett's thoughts on the topic from the mid-90s

January 13, 2020 | About:

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has two different share classes: the A Shares, which are worth over $300,000 apiece, and the B Shares, which are worth around $240 apiece as of the writing of this article.

Warren Buffett (Trades, Portfolio) decided to add B Shares to Berkshire's capital structure in the mid-90s. His growing popularity had ignited a burgeoning demand for Berkshire stock, and to satisfy this demand, the board decided to offer another share class to the public.

This decision wasn't driven by a desire to increase access to other investors who could not afford to buy the group's A Shares. If Buffett wanted to do that, he could have just split the shares, which he has said on multiple occasions that he does not want to do because the higher share price attracts a different class of shareholders and makes it harder for day traders to game the group's stock price (although he has used this tactic with the B Shares, which I'll come to later).

Instead, Buffett set out to create the B Share class to discourage abuse of Berkshire's stock price by mutual funds set up specifically to buy shares in the conglomerate.

Berkshire's new share class

The Oracle of Omaha explained why he was setting up the new share class at the 1996 Berkshire Hathaway annual meeting of investors:

"Over the years, we've had probably half a dozen people, one time or another, propose that the creation of an all-Berkshire investment company or unit trust. In other words, an entity that would hold nothing but Berkshire stock, and then would parcel out its own shares in smaller denomination pieces to the public. And we have generally discouraged that because we felt that there was considerable potential for abuse in such an arrangement."

Buffett explained that in the previous year, several unit trusts of this type had submitted documents for approval to the Securities and Exchange Commission. These investment vehicles would have offered exposure to Berkshire, but Buffett believed that they would come with substantial risks for investors:

"Holders of those trusts would've bought into an entity that had a defined life, but that had considerable, in the way of costs and some tax consequences, that they might not anticipate when they came in.
...
The — that the — a great many people would end up buying these unit trust holdings without any idea, really, of what they were buying, and with unrealistic expectations as to the future.

And that that would, in turn, create a considerable demand — because these unit trusts would go out and buy Berkshire shares — that would create a considerable demand against a fixed supply, much of which is almost unavailable because people have a low tax basis and are reluctant to sell, and I hope they're reluctant to sell for other reasons.

And that the very action of the creation of these, and that push on the demand, would — might very well create some speculative spurt in the stock, which in turn, would induce people who had been approached about the trust to feel they were missing even more of a good thing by rushing in."

In other words, Buffett believed that if these unit trusts were allowed to go ahead, it would create a bubble in Berkshire stock. Also, it would create an environment for unscrupulous Wall Street managers to charge investors excess fees and commissions to piggyback on Buffett's success. The subsequent bubble and then collapse would have been horrible publicity for Berkshire and Buffett.

To help counter these issues, Buffett launched the B Shares. He offered "as many shares as people wanted to buy," to satisfy all of the demand, and set a commission that was about "as low as any I've ever seen in many years on Wall Street," with the hopes of attracting high-quality investors who wanted to stay with the business forever.

Share split

Berkshire's decision to create the B Shares helped the company in 2009 when it acquired the remaining 77.4% of BNSF it did not own for $44 billion, including $10 billion of outstanding BNSF debt. To help facilitate the transaction, Buffett split Berkshire's B Shares 50 to one to allow BNSF's smaller shareholders to take up the share option if they wanted and provide more liquidity. The A shares remain unsplit.

Disclosure: The author owns shares of Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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Comments

Shapushki
Shapushki - 1 week ago    Report SPAM

What does, "...and set a commission..." from the below paragraph mean? Isn't it up to each broker to decide how much to charge in commission for trading shares?

To help counter these issues, Buffett launched the B Shares. He offered "as many shares as people wanted to buy," to satisfy all of the demand, and set a commission that was about "as low as any I've ever seen in many years on Wall Street," with the hopes of attracting high-quality investors who wanted to stay with the business forever."

Rupert Hargreaves
Rupert Hargreaves - 1 week ago    Report SPAM

Usually yes, but on this occasion, Berkshire offered the shares through Salomon Brothers, which Buffett had helped rescue a few years before. It is likely that he managed to negotiate an attractive deal with the broker to help investors buy the stock at a discount price. Of course, he would have had no control over commissions after the offering.

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