Thornton's financial commentary on the topic of Berkshire Hathaway appeared in the November 16, 2015 edition of Barron's Weekly. `
November 16, 2015
Views from beyond the Barron's staff - by Thornton Oglove
A Time to Glom; a Time to Deglom
As everyone from Warren Buffett to his smallest investor knows, Berkshire Hathaway is worth more than the sum of its parts.
The golden anniversary celebration of Berkshire Hathaway was proportional to the results: $10,000 invested in Berkshire in 1965 would be worth $180 million today.
With all the well-deserved adulation offered up at the temple of Buffett in Omaha last May, it’s not surprising that so many missed the message in his annual letter to shareholders. First he told them what they know: “Berkshire is now a sprawling conglomerate, constantly trying to sprawl further.” Then came the shock: He said the sprawling conglomerate’s future gains “cannot be dramatic and will not come close to those achieved in the past 50 years.”
Berkshire is now the largest conglomerate in America, with a market capitalization of about $340 billion. Investors ought to be asking if such a company can outperform the general stock market. It’s not merely sprawling; it’s ponderous, with too many of the attributes of a stock-index investment.
Buffett is widely recognized as an organizational genius, partly because he can run a company with 340,000 employees from a headquarters that has a staff of 25. More important, however, is that he leaves his 80 or so operating managers alone “to the point of abdication.” He can do this because Berkshire Hathaway has purchased only very successful businesses. “Buy into a business that’s doing so well an idiot can run it,” Buffett has said, “because sooner or later, one will.”
Given these circumstances, what should Buffett do with those 80 businesses that even idiots could run? The answer should be: Deconglomerate. If Berkshire’s divisions owe little to the wizard’s management acumen, and if the 80 businesses together can provide investors with only a market return, what’s the point of keeping them together if many of them could perform better separately?
THIS GOES AGAINST everything Buffett has said and done. During the past 50 years, Berkshire has paid a common-share dividend only once, and spun off only one company due to a request from regulators. At every Berkshire Hathaway annual meeting, several shareholders ask Buffett whether he can pay a dividend and spin off a few of the company’s corporations. Buffett’s reply is always the same, “Absolutely not.”
In the words of Teledyne’s Henry Singleton, there is a time to conglomerate and a time to deconglomerate. If Berkshire Hathaway were to deconglomerate, as many as 200 entities could eventually be spun off tax-free to shareholders and become public companies, and most would be paying dividends. In just a few years, the spinoffs would vastly enhance the total value of today’s Berkshire shares.
WHAT SHOULD BERKSHIRE INVESTORS DO TODAY?
Optimistic investors in Berkshire Hathaway should consider that the deconglomeratization of the company is just a matter of timing and Warren Buffett’s life span. They should retain their positions in the stock, and buy more on general stock-market weakness. As Buffett acknowledges, the current market price of Berkshire Hathaway is only a fraction of its intrinsic value. So investors should view their Berkshire Hathaway shares as the equivalent of a stock-index fund that carries the possibility of benefits from numerous tax-free spinoffs.
Meanwhile, Buffett or his successors could vastly enhance the holders’ value of Berkshire Hathaway because the company has about $60 billion in cash and could easily borrow another $60 billion in low-cost debt. The corporation could pay a one-time dividend of $120 billion, equal to 35% of its valuation.
Berkshire Hathaway also has a blue-chip investment portfolio worth about $130 billion. If it packaged these holdings into a mutual fund and passed shares in the fund on to shareholders, investors could gain another 35% of Berkshire’s current capitalization.
Just announcing these moves could increase Berkshire Hathaway’s stock-market valuation from 1.3 times book value to about two times book. Shareholders could see the stock advancing 50%, before the process of deconglomeratization of the corporation even begins.