We are all shocked and concerned about Warren Buffett's diagnosis of prostate cancer. But, for investors in Berkshire Hathaway (BRK.A), does it matter? On a personal level, he is fortunate to have caught it early at a treatable stage, and odds are he will live for a few years more. For shareholders, this is a shot across the bow -- the first test to see if they really believe that Berkshire is a fortress conglomerate that will continue to grow profitably and spin off cash for years after Warren is gone. With the stock down 1% in after-hours trading, I would not say they failed the test, but what else can we expect? The stock is not going to rally on this news.
Berkshire is an attractive portfolio, although some of the attractiveness is due to shrewd purchase prices. Even Warren admits to his hoarding instinct, and he rarely sells a business, even after it is proven to be lousy. For instance, would he ever sell BusinessWire? That service is basically a glorified email list, and it will continue to get disintermediated by the Internet. Anyone can enter the business and compile interest lists, and charge a lot less than BusinessWire does. I see this one going the way of newspapers and World Book Encyclopedia. (Take note: I submitted this question for the annual meeting, so perhaps it will get asked and Warren will address the issue.)
The succession question raised today is like déjà vu all over again. With a portfolio of "dozens of beautiful companies, and three ugly ones," Berkshire will work after Warren is gone. The question is whether the new capital allocators can be half as good as Warren is, especially with a capital base far in excess of what he had to deal with for most of his career. Sadly, I believe they will be able to do no better than average, even if they are of exceptional talent. It is rare that anyone can outperform with a portfolio of that size.
I am on record with a prediction that will take so long to pan out that it might be meaningless, but I will offer it anyway. Within 20 years after Warren's death, Berkshire will be broken up. Berkshire is his PA -- no more, no less. There is no rational reason for these companies to be under common ownership, other than the attraction of the cult that Warren has built over the years. Once the cult dissolves, and the first generation of sellers is gone, the next generation of operations leaders will need the incentive of equity participation to grow the subsidiaries. I believe the pressure will be fierce to de-conglomerate, especially if the shareholder base is diffused after the Gates Foundation sells off all the stock.
We shall see. In the end, this news is really just an UNCHed for Berkshire.
P.S. I will be at the annual meeting again in a couple weeks, as I have done since 1992. The meeting is over-covered as it is, but if there are any interesting, uncovered angles, I will pass them along.
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