Warren Buffett (Trades, Portfolio), the "Oracle of Omaha" and CEO of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), is not getting any younger. Although he has said many times that he does not intend to retire anytime soon, at the ripe age of 87, even with the best health care in the world available to him, he is not going to last forever. Realistically, he may not be around in 10 years' time.
Berkshire after Buffett
The question of succession is something that has surrounded Berkshire Hathaway for many years. It is in everyone's best interest to leave Berkshire Hathaway with a gold-plated succession plan to prevent the conglomerate from descending into chaos when the inevitable happens and Buffett is no longer around to steer the ship.
In many ways, Berkshire Hathaway already has the world's best succession plan in place. The business virtually runs itself with all subsidiaries managed individually. The Berkshire head office only picks up regular checks from these companies.
And there is a specific culture that runs across the business, which will undoubtedly continue when Buffett passes. For decades, he has been guiding those under him to think with a long-term outlook, focus on producing successful long-term outcomes and to cultivate a good reputation above all else.
Over time, these lessons from "the Oracle of Omaha" might vanish from managers' minds. But for at least a few decades after Buffett's death, I'm confident his outlook on life and business will remain fresh in the minds of the managers he leaves behind.
Many Wall Street analysts and financial commentators have speculated on what will happen to Berkshire Hathaway after Buffett. Every possible outcome from a breakup to business as usual has been touted (I'm not going to rewrite these points yet again). I firmly believe that the latter scenario will prevail for at least several decades after Buffett's death. Berkshire Hathaway virtually runs itself, and without Buffett I expected the company will be able to continue to turn out study returns for investors. After all, in its current state, the conglomerate produces more than $20 billion per annum in free cash flow. All you need is a sensible, long-term-focused capital allocator at the head of the group to distribute these funds while the rest of the business continues on as usual.
Nonetheless, while I do believe Berkshire will continue on its course for years after Buffett dies, the case study of Teledyne after its founder and longtime CEO Henry Singleton departed plays in my mind.
The greatest capital allocator
For readers unfamiliar with the Teledyne story, Singleton acquired this struggling defense contractor in the early 1960s and, over the next several decades, grew it into one of the biggest companies in the United States.
Through a combination of acquisitions and stock buybacks, Teledyne achieved earnings per share growth of 1,200% in only 10 years and return on equity exceeded 30%. An investor who put money into Teledyne stock in 1966 achieved an annual return of 17.9% over 25 years, or a 53 times return on invested capital versus 6.7 times for the Standard & Poor's 500.
At its peak, Teledyne had revenue of nearly $5 billion. Singleton's record of capital allocation was so good that even Buffett has praised him as being one of the best of all time.
When he stepped down, though, Teledyne quickly ran into problems.
During his tenure at the business, Singleton acquired more than 130 companies and amassed colossal equity portfolio. When he stepped down in 1991, the remaining management team began disassembling the company. By 1993, the number of companies in the Teledyne group had fallen to 21. In 1996, Teledyne merged with Allegheny Ludlum, a steel and specialty metals company. Three years later, Allegheny Teledyne was split into three independent corporations, including Teledyne Technologies (TDY, Financial).
Berkshire vs. Teledyne
History rarely repeats itself, but more often than not it does rhyme. While there are several critical differences between Teledyne and Berkshire, I can't help but think Berkshire may end up being disassembled in the same way.
I think the most crucial difference between the two situations is the fact that at the time of his retirement, Singleton only owned 7.1% of Teledyne stock, not really enough to give him any say over what happened to the company. Buffett (and eventually his estate) currently owns a little over a third of Berkshire, making him (by some distance) the largest shareholder (although he is slowly divesting his holdings).
Berkshire is also substantially larger than Teledyne ever was. 1989 was the company's peak year with total revenues of $3.5 billion. Last year, Berkshire booked $242 billion in sales across the conglomerate. Bits of the company might be sold off after Buffett dies, but the group is far too big to be acquired piecemeal. A selloff would take many years, possibly decades, to execute and achieve the best returns for investors (i.e., not a firesale).
To make it clear, I'm not saying Berkshire will fall to the same fate as Teledyne, but it is worth considering the similarities between these two case studies in trying to determine what the future holds.
Disclosure: The author owns shares of Berkshire Hathaway.
