For all his success in building a great corporation, Warren Buffett should now contemplate dismantling it
An investor who bought one Berkshire Hathaway share at just over $11 when Warren Buffett took control of the firm 50 years ago, and kept it, would have seen its value hit an all-time peak above $190,000 in recent days, an annual return of 21%. As shareholders count their blessings and head to Omaha, Nebraska, for Berkshire’s annual jamboree on May 3rd, it is only right to pay tribute to Mr Buffett’s outstanding success.
Berkshire is into all manner of business, from insurance to ice-cream parlours. Normally, such diverse groups suffer a “conglomerate discount”; but Berkshire’s shares trade at a 40% premium to the book value of its holdings. Mr Buffett’s proven formula has been to seek solid firms with good defences against competitors, leave their managers to run them as before, and hang on to them for the long term. His success over the past half-century makes him living disproof of the “efficient-markets hypothesis”, which argues that even the shrewdest investor cannot, over the long term, buck the collective wisdom of the market and consistently outperform it.
It would seem logical to conclude that the last thing Berkshire needs is to change. But Mr Buffett is 83 and, pace our cover leader this week, even this exceptionally skilled older worker must start thinking about what happens when he can no longer carry on. And the truth is that a business built on its boss’s knack of picking winners, his unquestioned authority within the company and his unrivalled reputation beyond it is unlikely to do anything like as well without him.
It was only Mr Buffett’s status as an investment god that let Berkshire resist pressure, in the late 1990s, to chase after surging dotcoms and thus avoid losing heavily in the ensuing bust. It was the same reputation that prompted GE and Goldman Sachs to turn to Berkshire as an investor when they were strapped for cash in the financial crisis, investments that struck gold. Mr Buffett’s good name will not be available to rent out so lucratively when he is gone. In any case, the best of Berkshire’s gains came in earlier decades, when it was easier to find small, nimble “gazelles” to satisfy its hunger for growth. Now to expand significantly it must hunt lumbering “elephants”, giant deals that are likely to require it to take an unfamiliar, hands-on approach to fix the target company’s problems.
The sale of the century
Mr Buffett says he has a succession plan, but Berkshire’s board may turn into a battlefield once he steps down (see article), with his replacement as chief executive torn between his son Howard, who will be the chairman, and strong-willed directors such as Bill Gates. It is all too common for a long-serving star boss to hand over to an apparently well-chosen successor only for him to fall flat—ask supporters of Manchester United (see article). Even diehard Buffett fans acknowledge that shares in Berkshire may plummet when he says goodbye.
So, given his irreplaceability and the unrepeatability of his past dealmaking success, Mr Buffett should remind shareholders at the annual meeting of the examples of James Hanson of Hanson Trust and Henry Singleton of Teledyne. These two conglomerate-builders of the 1960s to 1980s ended their stellar careers by breaking up the empires they had created, having recognised that an orderly sale would realise more value than a long, sad decline. Many of Berkshire Hathaway’s businesses are big enough to survive on their own. Others could be bulked up before being floated, or auctioned off to rivals or private-equity firms. There is no need for Mr Buffett to start this sale of the century now. But he should tell shareholders that a gradual break-up will be his main recommendation to his successor.