Buffett Critiques Breakup Ideas Even as Spinoffs Surge: Real M&A
2015-03-01 23:37:19.403 GMT
By Tara Lachapelle
(Bloomberg) -- Warren Buffett’s criticism of spinoffs is
creating a rare instance where investors may clash with the
Oracle of Omaha.
The world’s second-richest man devoted a chunk of his
annual letter to Berkshire Hathaway Inc.’s shareholders to
defending the company’s conglomerate structure. He denounced the
deal cycle in which a fee-hungry “banking fraternity” urges
acquisitions, only to later encourage their undoing for the sake
of “unlocking shareholder value.”
Spinoffs “make no sense for us,” Buffett wrote in the
letter, which was published on Saturday. Berkshire, as a
collection of businesses and investments, has reaped steady
profit and returns for investors, the letter said.
His remarks follow a record number of the transactions in
the past 12 months, according to data compiled by Bloomberg. The
rationale behind spinoffs is that a unit tucked under a diverse
company’s umbrella may be worth more if it were a separate
publicly traded entity. So far, it’s working: A Bloomberg index
that tracks spinoff stocks produced almost double the gain of
the Standard & Poor’s 500 over the past five years. From Pfizer
Inc.’s former animal-heath business Zoetis Inc. to drugmaker
AbbVie Inc.’s split from Abbott Laboratories, investors have
been cheering the moves -- and calling for more.
“Proof is in the pudding” because spinoff stocks have
“smoked the S&P 500,” said Joe Cornell, an analyst for Spin-
Off Advisors LLC in Chicago. “I expect Warren Buffett, with all
due respect, is talking his book a bit and may wish to dismiss
any dialog about him breaking up the company.”
Berkshire Returns
Buffett, 84, has used acquisitions to build Berkshire into
a $363 billion behemoth with businesses spanning from the
insurer Geico to railroad BNSF and underwear maker Fruit of the
Loom. Its stable of companies also includes See’s Candies and a
utility unit formerly known as MidAmerican Energy.
In the past 50 years, Berkshire shares have appreciated 1.8
million percent. And earnings at businesses other than insurance
and investments have grown about 20 percent a year since 1970,
his letter said.
Given the growing number of activist investors urging big,
diverse companies to narrow their focus, Buffett may be
concerned that there will be calls someday to break up his
empire when he’s no longer running it.
“Buffet is the best capital allocator of all time and his
decentralized conglomerate structure has created tremendous
shareholder value,” said Todd Lowenstein, who helps manage $16
billion at HighMark Capital Management in Los Angeles. “A cynic
might think he planted this controversy as a pre-emptive strike
to preserve his legacy.”
Better Together
Buffett says it would make no sense to break up Berkshire
because its businesses are worth more as part of the
conglomerate than as separate entities. They can enjoy certain
tax benefits, for instance, while saving on regulatory and
administrative costs. He also said that corporate breakups are
often driven by bankers seeking to generate fees.
While investors may agree with him on the first point, many
have been showing support for other companies that are pursuing
splits. A more narrowly focused business is easier for
shareholders to value, said Walter Todd, chief investment
officer at Greenwood, South Carolina-based Greenwood Capital,
which oversees about $1 billion.
“I can understand his dislike for what is perceived as
financial engineering perhaps, but allowing investors to
determine values for more pure-play companies versus
conglomerate-type companies makes some sense,” Todd said.
Cash Advantage
Unlike most conglomerates though, Todd said that at
Berkshire “there is no illusion of some type of combined
synergies between these businesses.” He simply buys companies
he finds attractive and lets managers keep doing what drew him
to them in the first place. And the cash they generate is often
sent to Berkshire headquarters for Buffett to reinvest.
The diverse nature of Berkshire’s businesses also allow
Buffett the “ongoing ability to build value” in a way that
firms that are focused on just one industry can’t, said Tom
Russo, who oversees about $10 billion including Berkshire shares
at Gardner Russo & Gardner.
“The ability to take See’s cash flows and invest in
MidAmerican means that we’ve never really run out of places to
deploy capital in Berkshire,” Russo said in a phone interview.
Since 1992, Berkshire has struck about $170 billion of
acquisitions, according to data compiled by Bloomberg. But it
continues to accumulate cash at a faster rate than Buffett can
invest it.
Breakup Risk
The rise in shareholder activism from investors such as
Carl Icahn could be both good and bad for Buffett. On the one
hand, he says it should create more takeover candidates so that
Berkshire’s $60 billion in cash can “constructively decrease.”
But a future Berkshire under different leadership could itself
become an activist target.
“The biggest risk in Buffett’s mind in terms of the
sustainability” of Berkshire is breaking the company up, said
David Rolfe, who manages about $11 billion including Berkshire
shares at Wedgewood Partners Inc. If the next CEO ever “sends
out a letter to the board saying, ‘I had an interesting
conversation with Carl Icahn,’ that’s his last day as CEO.”
For Related News and Information:
Berkshire Profit Falls 17% to $4.16 Billion on Investments
Buffett Says Next Berkshire CEO Must Fight Arrogance, Decay
Buffett Sees Son Howard as ‘Safety Valve’ If Next CEO Falters
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
--With assistance from Noah Buhayar in Seattle.
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Dan Kraut
2015-03-01 23:37:19.403 GMT
By Tara Lachapelle
(Bloomberg) -- Warren Buffett’s criticism of spinoffs is
creating a rare instance where investors may clash with the
Oracle of Omaha.
The world’s second-richest man devoted a chunk of his
annual letter to Berkshire Hathaway Inc.’s shareholders to
defending the company’s conglomerate structure. He denounced the
deal cycle in which a fee-hungry “banking fraternity” urges
acquisitions, only to later encourage their undoing for the sake
of “unlocking shareholder value.”
Spinoffs “make no sense for us,” Buffett wrote in the
letter, which was published on Saturday. Berkshire, as a
collection of businesses and investments, has reaped steady
profit and returns for investors, the letter said.
His remarks follow a record number of the transactions in
the past 12 months, according to data compiled by Bloomberg. The
rationale behind spinoffs is that a unit tucked under a diverse
company’s umbrella may be worth more if it were a separate
publicly traded entity. So far, it’s working: A Bloomberg index
that tracks spinoff stocks produced almost double the gain of
the Standard & Poor’s 500 over the past five years. From Pfizer
Inc.’s former animal-heath business Zoetis Inc. to drugmaker
AbbVie Inc.’s split from Abbott Laboratories, investors have
been cheering the moves -- and calling for more.
“Proof is in the pudding” because spinoff stocks have
“smoked the S&P 500,” said Joe Cornell, an analyst for Spin-
Off Advisors LLC in Chicago. “I expect Warren Buffett, with all
due respect, is talking his book a bit and may wish to dismiss
any dialog about him breaking up the company.”
Berkshire Returns
Buffett, 84, has used acquisitions to build Berkshire into
a $363 billion behemoth with businesses spanning from the
insurer Geico to railroad BNSF and underwear maker Fruit of the
Loom. Its stable of companies also includes See’s Candies and a
utility unit formerly known as MidAmerican Energy.
In the past 50 years, Berkshire shares have appreciated 1.8
million percent. And earnings at businesses other than insurance
and investments have grown about 20 percent a year since 1970,
his letter said.
Given the growing number of activist investors urging big,
diverse companies to narrow their focus, Buffett may be
concerned that there will be calls someday to break up his
empire when he’s no longer running it.
“Buffet is the best capital allocator of all time and his
decentralized conglomerate structure has created tremendous
shareholder value,” said Todd Lowenstein, who helps manage $16
billion at HighMark Capital Management in Los Angeles. “A cynic
might think he planted this controversy as a pre-emptive strike
to preserve his legacy.”
Better Together
Buffett says it would make no sense to break up Berkshire
because its businesses are worth more as part of the
conglomerate than as separate entities. They can enjoy certain
tax benefits, for instance, while saving on regulatory and
administrative costs. He also said that corporate breakups are
often driven by bankers seeking to generate fees.
While investors may agree with him on the first point, many
have been showing support for other companies that are pursuing
splits. A more narrowly focused business is easier for
shareholders to value, said Walter Todd, chief investment
officer at Greenwood, South Carolina-based Greenwood Capital,
which oversees about $1 billion.
“I can understand his dislike for what is perceived as
financial engineering perhaps, but allowing investors to
determine values for more pure-play companies versus
conglomerate-type companies makes some sense,” Todd said.
Cash Advantage
Unlike most conglomerates though, Todd said that at
Berkshire “there is no illusion of some type of combined
synergies between these businesses.” He simply buys companies
he finds attractive and lets managers keep doing what drew him
to them in the first place. And the cash they generate is often
sent to Berkshire headquarters for Buffett to reinvest.
The diverse nature of Berkshire’s businesses also allow
Buffett the “ongoing ability to build value” in a way that
firms that are focused on just one industry can’t, said Tom
Russo, who oversees about $10 billion including Berkshire shares
at Gardner Russo & Gardner.
“The ability to take See’s cash flows and invest in
MidAmerican means that we’ve never really run out of places to
deploy capital in Berkshire,” Russo said in a phone interview.
Since 1992, Berkshire has struck about $170 billion of
acquisitions, according to data compiled by Bloomberg. But it
continues to accumulate cash at a faster rate than Buffett can
invest it.
Breakup Risk
The rise in shareholder activism from investors such as
Carl Icahn could be both good and bad for Buffett. On the one
hand, he says it should create more takeover candidates so that
Berkshire’s $60 billion in cash can “constructively decrease.”
But a future Berkshire under different leadership could itself
become an activist target.
“The biggest risk in Buffett’s mind in terms of the
sustainability” of Berkshire is breaking the company up, said
David Rolfe, who manages about $11 billion including Berkshire
shares at Wedgewood Partners Inc. If the next CEO ever “sends
out a letter to the board saying, ‘I had an interesting
conversation with Carl Icahn,’ that’s his last day as CEO.”
For Related News and Information:
Berkshire Profit Falls 17% to $4.16 Billion on Investments
Buffett Says Next Berkshire CEO Must Fight Arrogance, Decay
Buffett Sees Son Howard as ‘Safety Valve’ If Next CEO Falters
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
--With assistance from Noah Buhayar in Seattle.
To contact the reporter on this story:
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Dan Kraut