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Rupert Hargreaves
Rupert Hargreaves
Articles (593)  | Author's Website |

Considering Berkshire After Buffett

Will Buffett's departure lead to the breakup of the business?

September 11, 2018 | About:

Warren Buffett (Trades, Portfolio) is not immortal. While he is considered the world's greatest investor, he won't be around forever.

At nearly 90 years old, he won't be running Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) for much longer either. 

His age and succession plan is, in my view, one of the most substantial issues currently facing Berkshire Hathaway, preventing new investors from buying into the growth story. If you look back through history, it is tough to pinpoint any examples of companies or empires that have been able to successfully transition through succession without changing in some way.

Well prepared

Berkshire is probably better prepared than most businesses for the changing of the guard because it is run in a decentralized manner.

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All of its subsidiaries are run individually, with headquarters only managing cash distribution and Berkshire Hathaway's equity portfolio. This structure undoubtedly provides a backstop against significant changes to the business, which gives me confidence that the conglomerate won't change significantly after Buffett has left. I am, however, concerned that without its founder, the company may succumb to corporate drift, losing sight of its core principles slowly over the following decades. There's also the possible risk of corporate infighting to consider.

As part of its succession plan, Berkshire Hathaway has named Gregory E. Abel and Ajit Jain as vice chairmen. Buffett's son Howard will be chairman, while Todd Combs and Ted Weschler will become chief stock pickers. The rest of the possible corporate structure is still unknown. While no future CEO has yet been declared, Buffett has said his responsibilities will be split into three different offices. Even though the candidates will be picked from inside the company, it's easy to see how conflict could arise without Buffett at the top of the pyramid. I'm not saying it will, but it is still a possibility.

Long-term breakup?

Any instability is unlikely in the years immediately following Buffett's death. When declaring the appointment of his new vice chairmen, the "Oracle of Omaha" call Abel and Jain "the two key figures at Berkshire," who have "Berkshire in their blood" and "love the company."

Another issue I believe will create problems at Berkshire is its overall size. As we have witnessed over the past two years, the company is a cash-generating machine, but it has also become its own worst enemy because it is now so big that acquisitions have to be significant to move the needle. The law of large numbers is already holding back the business, and it is only going to become harder for the company going forward.

Buffett is perfectly happy to sit on his hands do nothing, but will three managers be able to do the same? Depending on their outlooks for the different sections of the business, they may have conflicting views as to what to do with excess cash. These managers will be more vulnerable to criticism from outside investors than Buffett is currently.

All of this is speculation, of course, since the future is uncertain. Looking back at the successes and failures of other business empires that have lost their founders, however, it is difficult to see how Berkshire Hathaway can continue without disruption in the decades after Buffett's death. 

The company's overall size will only exacerbate things as it becomes harder and harder to make acquisitions of undervalued businesses that add significant value to the bottom line.

I'm not saying Berkshire Hathaway will collapse under its own weight, but spinoffs and dividends might be used to distribute value to investors. It will likely be many decades before this happens though.

Disclosure: The author owns shares of Berkshire Hathaway.

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.

Visit Rupert Hargreaves's Website


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