Buffett’s Berkshire Hathaway needs to be broken up

The writer is editor of The Dig and will soon join the faculty of the Wharton School at the University of Pennsylvania as a lecturer in financial accounting

When Warren Buffett inevitably leaves his post after more than 50 years at the helm of Berkshire Hathaway, no one else will be able to run the company as successfully as he has. The behemoth conglomerate should be broken up.

No doubt shareholders will be giddy to be back in person at Berkshire’s annual meeting, dubbed a “carnival of capitalism”, on Saturday after a 24 per cent share-price rise over the past year and a revival of Buffett’s dealmaking.

Buffett in March and April made three new blockbuster deals after a relative drought. He plunked down $12bn of his cash stash for closely-held insurance company Alleghany, raised his stake in Occidental Petroleum to 14.6 per cent with a $7.5bn investment, and purchased 11 per cent of computer and printer maker HP for $4.2bn.

But questions remain over Berkshire’s future, not just Buffett’s. At 91, he still combines the roles of chair and chief executive despite concerns among some shareholders, including Calpers, over the joint position. Only early this year, Buffett was complaining once more that he could not find anything cheap to buy.

Berkshire had been doing what every cash-rich company that has run out of good ideas does — buying back its own shares. According to his letter to shareholders, Buffett has spent $51.7bn in the past two years repurchasing 9 per cent of Berkshire’s outstanding shares. He repurchased $1.2bn more in the first two months of 2022.

Buffett may have been feeling stung after having to admit he overpaid for his last two big acquisitions and in effect financed someone to take his newspaper group off his hands.

Precision Castparts, acquired in 2016, sustained billions in writedowns in 2020. Kraft Heinz passed down billions in writedowns of its iconic brands to Berkshire in 2018 and 2019 based on its 26.8 per cent ownership stake. Berkshire Hathaway suddenly sold its newspaper group in 2020 to Lee Enterprises, which was already managing the operation. It sold the businesses for $140mn in cash but also became Lee’s sole lender, refinancing the company’s existing debt and lending it $576mn at a 9 per cent interest rate.

If an investor such as Buffett stumbles in deploying Berkshire’s war chest, what are the prospects for a successor? Even Berkshire’s annual report discloses as a risk factor that it is “dependent on a few key people for our major investment and capital allocation decisions”. Yet the company was quiet about succession until May last year. It emerged then that 59-year-old Greg Abel, vice-chair of non-insurance operations, would step up in an emergency.

Were that to happen, it should be the catalyst for a broader shake-up. Abel shares responsibility for running Berkshire under Buffett with 70-year-old Ajit Jain, vice-chair of insurance operations. Jain and Abel should break Berkshire more explicitly into at least two independent parts — insurance and its investment portfolio in one vehicle and the operating companies in another.

Abel runs a dog’s breakfast of operating companies that deliver operating income that pales in comparison to the gains of Berkshire’s $350.7bn of equity investments. The emphasis in the press and in the company’s filings is on the investment portfolio.

A split would allow greater investor scrutiny of the operating companies at the very least. Berkshire’s disclosures are inconsistent about the largest subsidiaries and nonexistent about the rest, despite the relative size of some of the companies. An independent Burlington Northern Santa Fe railroad, with revenues of $22.5bn in 2021, would rank 129th by size in the Fortune 500.

Gains from investing Berkshire’s insurance “float”— cash from customer premiums Berkshire invests but does not own — subsidise Buffett’s bets. But a reckoning for that structure is inevitable. A split into two arms under Jain and Abel is a start. Selling off companies that can thrive on their own comes next. Buffett’s successors could even start a hedge fund to invest “float” gains and charge shareholders “2 and 20” management and performance fees so as to avoid the hassle of owning railroads and random manufacturers.

Berkshire Hathaway has been successful for so long because of Buffett‘s acumen. There is a “halo effect” for the conglomerate that others such as GE lost long ago. Shareholders, regulators and the majority of the media give Buffett the benefit of the doubt and forgive screw-ups. I doubt any successor can repeat that.