NYTimes: "Buffett May Be Buying Second Opinions Along With General Re"
June 22, 1998
By EDWARD WYATT
It could be Warren Buffett's biggest challenge yet.
Not the acquisition of General Re Corp., the
reinsurance giant that Berkshire Hathaway Inc. agreed
to buy last week for $21.7 billion in stock. Rather,
his taking on the often-unruly Wall Street
professionals who, as part of the deal, will become
holders of 15 percent of the shares of Berkshire
Hathaway, Buffett's far-flung corporate empire.
For years, Buffett has enjoyed a luxury unknown to most
other American chief executives. He answers almost
exclusively to individual investors, roughly 150,000
average Americans who have often paid premium prices to
invest by his side as holders of Berkshire Hathaway
stock. But institutional investors -- the professionals
who manage portfolios for mutual funds, college
endowments and big corporations -- have almost wholly
avoided Berkshire.
With the purchase of General Re, Berkshire Hathaway
will gain an entirely new class of shareholders: the
institutions that now own some 85 percent of General
Re's shares.
Those professional investors, if they decide to remain
long-term holders, are more likely to ask pointed
questions about Buffett's plans for Berkshire, his
investment outlook and who will be running the company
after he departs. The clash of values created by that
collision of Main Street and Wall Street could be one
of the most interesting experiments to hit Omaha, Neb.,
in years.
Institutional investors have not avoided Buffett's
company because they do not believe in the magic of the
man from Omaha. Rather, Berkshire shares are relatively
illiquid. Only about 200 of the company's class A
shares, which trade for $80,900 apiece, change hands on
the New York Stock Exchange each day. That has made big
professional investors, who demand stocks that can be
traded easily and quickly, loath to invest.
Even the company's class B shares, first offered two
years ago as a cheaper alternative to improve the
stock's liquidity, can, at $2,705 a share, sometimes
prove hard to buy and sell.
Institutions have also stayed away because individuals,
in their eagerness to own what Buffett owns, have often
pushed the price of Berkshire's stock far above the
value of the assets owned by the company.
Berkshire Hathaway is not, of course, the average
corporation. It is a fanciful conglomerate that
combines Main Street businesses that seem to personify
Buffett's homespun image -- like See's Candies,
International Dairy Queen and World Book Encyclopedias
-- with big stakes in some of corporate America's crown
jewels, like Coca-Cola Co., Walt Disney Co. and
Gillette Co.
At a news conference on Friday to announce the
acquisition, Buffett sounded sanguine about the change
in his constituency. "We would hope that what we do at
Berkshire makes enough sense to them," he said.
One of the benefits of the merger would be to create "a
substantially larger float" in Berkshire shares,
Buffett said -- referring to the number of shares in
general circulation.
"I think there will be more trading" as a result, he
added, perhaps making institutions "more willing to own
Berkshire."
At the end of March, five institutions each owned more
than 3 percent of General Re's shares, according to
Technimetrics Inc., which tracks institutional stock
data. Capital Research and Management, which oversees
the American Funds family of mutual funds, was the
largest holder, owning 6 percent of the shares,
followed by Fidelity Investments, the Regents of the
University of California, Davis Selected Advisers and
Invesco Capital Management.
Among mutual funds with big stakes in General Re were
Washington Mutual Investors, the Investment Company of
America and Fundamental Investors, each part of the
American Funds family; the Fidelity Magellan fund, and
Davis New York Venture fund.
In contrast, only one institutional investor owns more
than 3 percent of Berkshire Hathaway's class A shares:
Ruane Cunniff & Co., a New York investment firm whose
principals, Richard Cunniff and William J. Ruane,
manage the Sequoia Fund and are longtime friends of
Buffett. And the only institution with more than 3
percent of Berkshire's class B shares at the end of
March was Warburg Pincus Asset Management, with 3.4
percent.
Buffett hinted that he hoped those big professional
investors would stay around -- as long as they let him
run the show: "We may well develop a base of
institutional investors who subscribe to the same
philosophy that our individual investors have."
One subject likely to interest those institutional
investors is what happens to Berkshire Hathaway after
Buffett, who is 67, retires or dies. General Re's board
had similar questions in considering the merger,
Buffett said.
"We shared some views with them about what will happen
with my shares in the company on my death and after my
wife dies," Buffett said. "There is a plan in terms of
succession to the jobs that Charlie and I have,"
Buffett said, referring to Charles Munger, vice
chairman of Berkshire Hathaway. While he did not offer
specifics, Buffett said, "I know the General Re
directors felt the chances were good of having a
favorable environment for General Re to operate for the
next 30 to 40 years, and that they couldn't do any
better than that."
Ronald Ferguson, chairman and chief executive of
General Re, who will become a Berkshire director as
part of the merger, said, however, that except
concerning the operations of General Re, he is not in
line to play any part in those succession plans.
Institutions might also wonder what Buffett is going to
do with the $24 billion in new investment capital that
will come into the company from General Re's
operations. Only about $5 billion of that is invested
in common stocks currently, Buffett said, with the
balance in fixed income, and the biggest portion of
that in municipal bonds.
Buffett, who recently has said that he has had a hard
time finding cheap stocks to buy, admitted that he did
not yet know the answer to that.
"This deal is not being done to create cash in the till
to seize opportunities that we couldn't seize before,"
he said. "I don't have a lot of great ideas, or even a
lot of good ideas."
And of the additional money, he said, "It's not going
to make me any smarter."
Copyright 1998 The New York Times Company |
