What Will Happen to Berkshire Hathaway Post-Buffett?

The legendary investor, Warren Buffett, when asked what will happen when he is no longer at the helm of Berkshire (BRK.A), always is quick to assure us that he has identified qualified successors to run the company and manage the investment portfolio. Besides, he feels fine and his doctors proclaim him in good health.

I believe Warren. He has a plan and who am I to possibly criticize the individuals that he selects as his heirs apparent? Additionally, his diet is similar to mine, lots of cheeseburgers and steaks and, best that I can tell, his exercise routine is as infrequent as mine. So, I'm not worried about Warren's imminent demise or his designation of successor management.

Conventional wisdom has it that the Berkshire price is discounted for the eventual death of its legendary investor and leader. It also is likely discounted for the conglomerate nature of Berkshire with its many disparate parts. Despite the discounts, Berkshire has been a wonderful success story financially for its shareholders and an important instructive lesson in prudent investment techniques and business ethics. While I no longer hold a Berkshire position, I have certainly benefited from Warren's performance, discount or no discount.

If Berkshire is such a wonderful company and it sells at a discount already that reflects the ultimate demise of Warren, then why should we be concerned about that eventual happening? The answer is found in the composition of the company's portfolio of businesses. Fabulously successful entrepreneurs exchanged control of their companies to Berkshire for lots of cash and the ability to continue to run their baby unhindered, plus access to, and the friendship of Warren Buffett. For years the tradeoff has worked wonderfully for all concerned.

I would suspect that Buffett would suggest to his successors that they manage Berkshire as he has, both in the investment area and in the shepherding of the conglomerate companies and their managers. But will they? Strong managers tend to put their own stamp on the companies they run. They also won't be given the benefit of the doubt, as Warren was, because of his esteemed reputation, in similar situations to Salomon Brothers and General Re. The new guy[s] will know that they won't get any free pass and will want to keep a closer watch on subsidiaries than Warren does. That will mean more reporting and trips to Omaha for consultations. Home office staff increases and reporting responsibilities will evolve and, of course, there won't be any phone calls or interaction with Warren. Instead there will be reporting and performance reviews.

Expectations, reporting, and performance reviews are appropriate, but if you are already a billionaire and your family is financially set are you willing to be second guessed by a mere multimillionaire CEO? Maybe the world's richest man is worthy of asking you about your subsidiary's latest quarterly results, but how will it sit when a new CEO inquires and has suggestions and expectations? Tension is inevitable.

The bulk of Berkshire is insurance and its invested float. That shouldn't be impacted by my concerns about the conglomerate operating companies. But, those companies are significant and I believe there will be rapid turnover at the executive level and sub par performance under a new regime. Overall performance will be retarded as the new Berkshire management divests itself of many subsidiaries. In the meantime, Wall Street gets confused or disillusioned and the share price comes under pressure.

Without Warren, Berkshire will be under share price pressure until it slims down to an insurance holding company with significant utility and industrial concentrations. I sold my position earlier this year and while that decision looks good today, I probably sold too soon, as Warren undoubtedly remains healthy, wise, and in control for years to come. But when that time does come, his billionaire subsidiary presidents won't like the new regime.

Disclosure: No Berkshire stock ownership.

Comments

[SteveR:]

I don't know William. To assume that a new leader will emerge and completely reverse the culture that has been part of Berkshire seems to be the least probable outcome. I would say that the most probable outcome would be a continuation of the Berkshire culture, which is what sets it apart from almost all other large US corporations. It's not like Buffet is the only one at Berkshire that recognizes their recipe for success. Granted Buffet is an "Einstein of Investing" and cannot truly be replaced but he can be emulated fairly well and I think they have spent a lot of time trying to find the best Buffet emulator.

I think the more likely scenario would be this. Buffet will go and the market will overreact in typical fashion and oversell, presenting a really good buying opportunity.

Jan 14 11:44 AM

[long_on_oil:]

You are totally discounting a board of directors that have been with Buffet for years. There is no way that board will let anyone deviate from the way Warren is running the company. I do agree that no one else will have Warrens investment acumen but his formula for success can be followed.
Another thing to consider is the value of a Berkshire share if all the Berkshire companies were to go public. I personally feel the value of the parts of this company is far greater than the sum.
Remember, Warren said that upon his death it will be the single best time in the history of the company to buy Berkshire. I think that single piece of advise is his last gift to all of us shareholders.

Jan 14 06:03 PM

[William Kab...:]

Steve and Long On Oil, thanks for your input. I'm convinced that Warren and his board have thought long and hard about a replacement. Their decision will be as smart as is possible. But, and this is my thesis, no one is Warren. The successor will not have the years of expertise, the patience, and the goodwill of Buffett. Buffett believes in his CEOs and they believe, and feel obligated, in him. For all of his former owner/ceos, and their teams, it remains enjoyable to continue to run your baby, diversify assets for estate planning, and get to interact periodically with the world's greatest investor. How do you beat the deal Warren gives them?

The new guy will cause, probably not intentionally, the fun to end and turn billionaires into mere subsidiary ceos. That may well be a position that you and I would find attractive, but these guys are really rich. They don't have to do anything that they don't want to do. I cannot see a new ceo not asking for more reports, updates, plans, etc, along with constant tinkering. I also can't see the BRK BofD telling the new ceo to let the subsidiaries run free.

In almost every situation, acquired ceo/owners that try to stay don't last. It's just not the same. Berkshire will face the transition that I describe. It won't be fatal, but it will be disruptive.


On Jan 14 11:44 AM SteveR wrote:

> I don't know William. To assume that a new leader will emerge and
> completely reverse the culture that has been part of Berkshire seems
> to be the least probable outcome. I would say that the most probable
> outcome would be a continuation of the Berkshire culture, which is
> what sets it apart from almost all other large US corporations. It's
> not like Buffet is the only one at Berkshire that recognizes their
> recipe for success. Granted Buffet is an "Einstein of Investing"
> and cannot truly be replaced but he can be emulated fairly well and
> I think they have spent a lot of time trying to find the best Buffet
> emulator.
>
> I think the more likely scenario would be this. Buffet will go and
> the market will overreact in typical fashion and oversell, presenting
> a really good buying opportunity.
>

Jan 15 11:45 AM

[WatcherofWEB:]

Eventually the Gates Foundation will be the largest Berkshire holder, and Bill Gates has been identified as the future Chairman of the Board. With Warren's gift and the accompanying responsibility to continue as he has instructed, it is highly unlikely that you will see a material change in the Berkshire culture. Sales of subsidiaries is an even more remote possibility. The backing of Gates will add credibility to the CEO and address any concerns of a mere multi-millionaire overseeing all those billionaires. All that said, the new leadership - even under the watch and direction of Mr Gates - will not be given anything approaching the latitude currently enjoyed by WEB.

Jan 18 10:40 PM

[Kospi:]

Ajit Jain is a Buffett clone. He and David Sokol will run Berkshire just fine. The investment side has plenty of interested applicants according to Buffett. We might see a Seth Klarmen step forward out of respect to his idol.

Jan 25 07:55 AM