Many different commentators, including Thornton L. Oglove the veteran on Wall Street, feel that it is time for Warren Buffett to break up Berkshire Hathaway.
Not everybody agrees with it this particular stance, especially since the company will do better as a large entity. But that is just some people’s opinion. The truth is that it’s way more interesting to hear Charlie Munger and Warren Buffett talk about the split potential, or lack thereof.
Fortunately for us, during the annual meeting in 2014, Fortune magazine’s Carol Loomis asked Charlie and Warren about potentially breaking up Berkshire Hathaway. Below are some of the notes based on the question from Carol, and you can also read responses from Charlie and Warren.
Carol Loomis: Berkshire owns 79 unrelated businesses – a model which has almost universally not worked well, except that Berkshire. The probabilities do not seem favorable that it will work well for your successors.
Warren: The model has worked well for America. If you look at all these disparate businesses, such as if you looked at the Dow Jones index during its history as a single entity [though it rotated] going from 66 to 11,000… clearly something went right. Owning a group of good business isn’t a bad plan.
Many conglomerates, such as Litton or Gulf and Western, were financial engineering. You were put together to issue stock at 20-times earnings and buy stock at 10-times. The idea was to fool people with this chain-letter approach.
Our approach makes sense: great managers, great businesses, conservatively capitalized. Capitalism is about allocating capital, and we can do that without tax consequences. We can take money from See’s and move it to the place of best return, as the situation says, be it wind farms or whatever. And nobody is better to do that than Berkshire. But, it needs to be done with business-like principles, not stock promotion. You can see what happened with Tyco. If companies are issuing stock continuously, they are probably playing a chain-letter game. Charlie?
Charlie: I think there are a couple of differences between us and people who are generally thought to have failed at the conglomerate model. One is that we have an alternative. When there are no other companies to buy, we have securities to buy. Also, most of them were hell-bent to buy, and we feel no compulsion to buy for the sake of it. I don’t think we’re a standard conglomerate, and we’re likely to continue to do very well.
Many companies have abused and misused the conglomerate model. Investors have the right to look at conglomerates negatively, especially due to previous history. Berkshire Hathaway stands apart from the pack. From a fundamental standpoint, it makes sense. But this assumes that the company will continue to be properly managed.
It’s quite clear that Buffett does a great job managing it well, and he’s created a culture and organization that will allow his successors to eventually manage it correctly. Berkshire Hathaway shareholders will be very happy to know that the company is going to remain intact.