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Politics : Ask Michael Burke

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To: Don Lloyd who wrote (76364)	2/21/2000 5:22:00 PM
From: Freedom Fighter	Read Replies (1) of 132070

Don, >>If Warren is evaluating a business to take it private, ALL that matters is its earning potential on net capital. << I did understand the point you were trying to make. The point that I was trying to make is that his view of what the company was "actually earning" would change depending on the compensation arrangement. General Re was reporting approximately 1 billion of earnings according to GAAP. It cost Warren 50 million annually to get rid of the option plan. His valuation would have been identical regardless of whether there was an option plan or a cash plan. But that valuation would be based on 950 million in earnings, not the reported 1 billion. Whether his cost comes from an outflow of cash or from dilution of ownership he measures it. I believe your assumption is that there is always a 1 to 1 relationship between cash in/out and value. That is not the case. Widely varying multiples of earnings and price to capital are paid for businesses depending on expected and sustainable returns on capital, prospects, risk, etc... He is measuring economic reality from an earnings perspective. If he got to keep the 50 million but instead gave up a piece of Berskhire he would consider that a wash. No earnings. Wayne

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