Berkshire Beyond Buffett(89)

Teachers Advisors Inc. 2,267,430 0.19

Royal Bank of Canada 2,251,053 0.19

Allianz 2,240,609 0.19

Clearbridge Investments 2,236,151 0.19

INVESCO 2,057,949 0.18

Cortland Advisers 2,000,000 0.17

BMO Financial 1,961,063 0.17

American Century 1,912,350 0.16

ING Inv. Mgmt. 1,890,652 0.16

Parametric Portfolio 1,841,284 0.16

Check Capital Mgmt. 1,782,399 0.16

Dimensional Fund 1,768,096 0.16

SQ Advisors 1,754,366 0.16

Frank Russell Trust Co. 1,751,443 0.16

APG All Pensions Group 1,698,381 0.15

Barclays 1,658,413 0.14

Chevy Chase Trust 1,646,451 0.14

Legg Mason 1,586,376 0.14

Sprucegrove Inv. Mgmt. 1,574,265 0.13

Great West Life Assur. 1,558,404 0.13

Wisconsin Inv. Bd. 1,552,376 0.13

Mizuho Financial 1,540,497 0.13

Ohio Public Emp. Ret. 1,518,038 0.13

State of Tennessee 1,490,061 0.13

Citigroup 1,474,054 0.13

Warren E. Buffett 1,469,357 0.13

Baillie Gifford & Co. 1,463,455 0.13

STRS 1,353,327 0.12

BNP Paribas 1,311,726 0.11

HSBC 1,266,295 0.11

Eaton Vance Mgmt. 1,244,371 0.11

PNC 1,237,468 0.11

Wintergreen Advisers 1,222,090 0.10

Klingenstein Fields 1,179,926 0.10

AXA 1,161,424 0.10

Gateway Inv. Advisors 1,132,067 0.10

Prudential 1,125,510 0.10

Weitz Wallace 1,118,981 0.10

Met Life 1,115,353 0.10

Toronto Dominion Bank 1,101,182 0.09

Creative Planning 1,074,700 0.09

Brown Advisory 1,051,916 0.09

Note: Shaded entries indicate portfolio concentration.

Source: Bloomberg (year-end 2013).

Berkshire’s traditionalist owners and activist shareholders might have sharply different preferences in a number of scenarios. One concerns Berkshire’s dividend policy, which is to retain each dollar of earnings if it increases market value by at least one dollar, and otherwise to pay dividends. Under that policy, Berkshire has not paid a dividend since 1967. As Berkshire grows, the likelihood of paying dividends under this test increases—and shareholders of all stripes could endorse this possibility. But activist shareholders unaligned with Berkshire tradition may agitate to change its dividend policy to make large and frequent cash distributions.

Another scenario is dealing with poor performance. Amid serious or prolonged stagnation, whether at particular subsidiaries or Berkshire-wide, activists may seek radical change, not only divesting targeted businesses but stripping Berkshire down, splitting it up, or selling off its parts. They may be more impatient than Berkshire’s traditionalist shareholders. Some might even prescribe both asset divestitures and dividends of the proceeds.

To fight such battles, imagine that Berkshire stalwarts consider taking the company private. A giant undertaking, going-private transactions are never easy. At Berkshire, it would invite competing bids from groups prepared to break the company up for short-term gain as well as lawsuits challenging the fairness of the process and price. But the threat of a going-private transaction may be enough to get ambivalent shareholders to favor traditional Berkshire values and defeat rivals.

To go private, stalwarts would need to corral a group of up to three hundred holders to continue owning Berkshire as a closely held firm (that figure is the legal cutoff distinguishing public from private companies). Depending on the exact distribution of shares among stalwarts, including Buffett and/or his estate and legatees, a group of three hundred would command a large portion of the voting power, at least two-thirds and as much as three-fourths. To acquire the remainder would therefore require some $75–100 billion, much larger than any buyout in history but within reach given the resources such a group commands.

The real test would be persuading other shareholders to agree. Short-term holders will surely tender for a small premium to the market price; long-term devotees of Berkshire culture will hold out as they always have.20 If the latter represent a meaningful portion of the shareholder body, a going-private offer would fail, and the traditionalists would be vindicated. Such a result would be the ultimate validation of the durability of Berkshire culture.

But suppose that proved incorrect: suppose opponents of traditional Berkshire values prevailed, and enough shares were tendered to take Berkshire private. That might do Berkshire a favor as an institution, because it may be better off as a private company owned by its traditional stalwarts than a public one exposed to short-term pressures from analysts and activists. For Berkshire, there are few advantages to being a public company and numerous disadvantages.

While Berkshire may have gained net advantages from its status as a public company in earlier decades, it is not clear that being public remains beneficial.21 Berkshire does not need the public capital markets, as it is a net supplier of capital, generating vast amounts of it from operations and investing it across wide sectors of the economy. If Berkshire desired external capital, its decentralized structure would pinpoint the particular subsidiary of interest. The subsidiary could go directly to the debt market to supply it, as Berkshire Hathaway Energy and BNSF do.