Berkshire Hathaway and a Buffett-less Future

As Warren Buffett approaches his ninetieth birthday, Berkshire Hathaway shareholders might be worrying about the company’s future, according to a recent article in Barron’s. But the article outlines several issues that could be “resolved in a post-Buffett era.”

Here are some highlights:

  • New leadership could “break up the conglomerate to unlock value—or at least be more amenable to an idea that Buffett opposes:” Although Buffett has long argued that Berkshire is better as a conglomerate, the article notes that companies like it are “an endangered species,” citing others (General Electric and United Technologies) that have broken up in the wake of shareholder pressure.
  • There is still mystery surrounding who will succeed Buffett—other than the next CEO will come from within the company. Many believe that Greg Abel (chairman of Berkshire Hathaway Energy) is the likeliest choice, although Buffett named Todd Combs as head of GEICO last year. In recent years, Buffett has also delegated more responsibilities to insurance underwriter Ajit Jain.
  • “Until the post-Buffett era opens the door to greater shareholder influence,” the article says, “don’t be surprised to see activist investors taking positions in Berkshire and gently offering suggestions while biding their time.” Trading at what the article describes as “below the sum of its parts,” Berkshire shares are already being purchased by Bill Ackman of Pershing Square Capital Management—who made it one of his largest holdings last year. Ackman told investors that the stock has a “cheap valuation” and is “likely to increase substantially over the coming years.”
  • With its hefty cash holdings, Wall Street would look favorably upon Berkshire finding an “elephant-size” acquisition, but the article notes that “Buffett handicaps himself because he won’t participate in corporate auctions. He’s also price-conscious, which makes it tough to do deals now, given that valuations have gotten lofty during the nearly 11-year bull-market run.”

The article concludes that Berkshire is a “sleeper that offers investors many ways to win, including a bigger buyback and a dividend, a large accretive acquisition, better profitability, and a potential corporate breakup. While Buffett has come to personify Berkshire, there’s reason to believe that the company will be a market beater when he’s gone.”