One Reason for the Berkshire Arbitrage

Why are Berkshire Hathaway's B shares still selling at a substantial discount? The answer might have something to do with the Gates Foundation, which is in the middle of a three-year plan to liquidate most of the shares it owned last year.

When Warren Buffett decided to donate most of his shareholding in Berkshire Hathaway to the Gates Foundation, he didn't want to give the foundation control of his company. So before giving away his voting stock, he first splits it into B shares, which carry many fewer voting rights. He has also told the Gates Foundation that he wants his entire annual donation of stock spent every year, rather than just getting added to the Foundation's endowment.

As a result, the number of B shares in circulation is constantly rising, as Buffett converts his A shares, and the Gates Foundation is a more-or-less permanent seller of the B shares. It's easy to see how the price of the B shares will be depressed as a result, especially when the holders of A shares are generally extremely long-term investors with no desire to sell at all. As a result, it could be a very long time indeed before this arbitrage is closed.

(Thanks to John Hempton for pointing this out to me.)

Comments

[Vox Rationalis:]

Hmmm. CNBC reported on July 3 that the 2008 gift was worth $1.8B, which was about 456,000 B shares at the July 2 close. But I can't find a solid number for average shares traded - my best guess is around 30k, which would put this at 15 days. Not insignificant by any means.

But looking at the data, there is not a long-term gap following the gift. There was a sustained gap around 8/07 which could be explained by sustained selling, but I doubt it. It's far more likely that the Foundation is just selling a couple of thousand shares every day.

It appears the market's arbitrage mechanisms tended to work as expected up until about September. The gap measure then became much more volatile, dramatically swinging into almost uncharted levels on both sides of zero. Nothing close to that 10% gap it hit Friday, though. I suspect it'll be back to zero by the end of next week if not sooner. And then - who knows.

Feb 24 02:08 PM

[Vox Rationalis:]

And it's done. BRK.A now worth 1.6% less than 30x BRK.B.

Feb 25 10:23 AM

[Vox Rationalis:]

Whoops. Spreadsheet error. BRK.A now worth 3.9% more than 30xBRK.B.

Feb 25 10:24 AM

[dukeow:]

I'm almost halfway through the bio. of Mr. Buffett. His high school is about 2 miles from the one I went to. He was two years ahead of me. No, it wasn't in Omaha!. His father was congressman for several terms, and in those days one found housing in D.C. for the term. So the whole family moved east while congress was meeting.

A result of these conversions will concentrate voting even more heavily on Buffet's remaining shares. With this flood and reduced price I'l have to think about more shares.

Feb 25 06:59 PM