Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc., said his life’s work won’t be broken apart by activist investors once he’s no longer at the helm.
“The market value of Berkshire is going to be so great that, even if all the activists got together, they couldn’t do much about it,” Buffett said Saturday at his annual shareholders meeting in Omaha, Nebraska. He was responding to an investor’s question about how the company’s future leaders would prevent a breakup.
Berkshire owns insurers, electric utilities, factories, car dealerships, ice-cream shops and one of the largest U.S. railroads. The company’s future was a focus of the event, which drew a record crowd of tens of thousands as Buffett, 84, celebrates his golden anniversary running the business.
Buffett and Vice Chairman Charles Munger, 91, assured shareholders that the company’s culture would endure and dropped hints about the characteristics of the next CEO. Buffett said his successor should have a “significant array of skills” and not just investing expertise. He wasn’t asked directly about who the board has picked to eventually take the job.
Investors have speculated that Ajit Jain and Greg Abel are the leading candidates. In the company’s annual report this year, Munger described both as “world-leading” executives who are in some ways better than Buffett. Jain, 63, runs Berkshire’s namesake reinsurance operation, while Abel, 52, oversees the energy-utility business.
Buffett’s Strategies
Buffett, who is Berkshire’s controlling shareholder, said the firm’s culture already runs deep and will be around long after he’s gone. For decades, the billionaire has operated the business in a highly decentralized fashion. Managers of its dozens of operating units handle day-to-day decisions, leaving the CEO time to focus on investments and acquisitions in whatever industry presents the best opportunities.
That formula has built Berkshire into a massive enterprise with a market value of more than $350 billion and businesses like Geico, BNSF railroad and See’s Candies.
First-quarter profit climbed 9.8 percent to $5.16 billion on higher investment income and improved performance at the railroad, the company said Friday. Shares climbed 1.6 percent to $219,225 at 10:21 a.m. in New York, the biggest increase since February.
As Berkshire has grown, other giant companies have narrowed their scope, sometimes under pressure from shareholders or regulators. General Electric Co. plans to exit most lending operations and refocus on its industrial roots as a way to shed its government designation as a firm that’s too big to fail.
Regulators Quiet
Even as it operates one of the world’s largest insurers, Berkshire is unlikely to be named a systemically important financial institution, Buffett said on Saturday. He said regulators haven’t contacted the firm about the tag, which can mean tougher capital, leverage and liquidity requirements.
“I do not think that Berkshire Hathaway comes within miles of qualifying as a SIFI,” Buffett said. He said SIFIs tend to get at least 85 percent of revenue from financial operations, and “we don’t come remotely close to that.”
Beyond Berkshire’s scale, it’s is unlikely to succumb to activist pressure because shareholders have been treated so well by Buffett over the years, said Richard Cook, co-founder of Cook & Bynum Capital Management. Ten thousand dollars invested in the company in 1965, the year Buffett took control, would have been worth more than $180 million at the end of 2014.
“Berkshire will have a really good shareholder base for a long time,” said Cook. “Even the people who have bought shares in the last three years largely believe in the principles of the company.”
Stock Repurchases
Berkshire’s buyback strategy could also deter activists, said David Rolfe, chief investment officer at Wedgewood Partners Inc. The company had more than $60 billion in cash at the end of March and Buffett suggested in February that it could make repurchases once he’s gone if the price drops.
“The company will have massive resources to buy back stock,” said Rolfe, which would nullify activist pressure.
Two of the largest and best-known activist hedge-fund managers, Bill Ackman and Carl Icahn, said in interviews after last year’s Berkshire annual meeting — when activism was also challenged — that critics confuse their strategies with others who invest for short-term gains. Their approaches build better businesses by keeping companies and boards accountable, Ackman and Icahn said.
Munger’s Take
About $65.4 billion has poured into event-driven funds, which include activist investors, from the beginning of 2013 through the first quarter of this year, according to data from Hedge Fund Research Inc. That’s 41 percent of all the money that went into hedge funds during that time, the data show.
Investors have sought gains in an extended period of low interest rates that has depressed yields on bonds and driven up prices of stocks.
Munger has been outspoken about the activist trend. At last year’s annual meeting, he questioned whether money managers who agitate for changes actually improve companies. He reprised some of that critique on Saturday.
“I don’t think it’s a great age, this age of activism,” he said. “It’s hard for me to think of many activists I want to marry into the family.”
Buffett said he knows from friends running other companies about the challenges of confrontations with activists and said Berkshire offers a solution.
“We should be a place where people can dump their activists,” he said.
–With assistance from Katherine Burton and Pierre Paulden in New York.