What's Berkshire Hathaway's Expected Life?

Berkshire Hathaway (BRK.A) has a lot of equity: its book value is about $125 billion. And since equity is forever, it makes sense for Berkshire to have a very long time horizon when it comes to buying assets. But still:

Berkshire Hathaway Inc.’s Warren Buffett, who agreed to buy Burlington Northern Santa Fe Corp. in his biggest takeover, said the railroad’s results in the next 100 years will justify a $26 billion bid that’s “not a bargain.”

“It’s a good asset for Berkshire to own over the next century,” Buffett said in an interview with Charlie Rose.

It’s refreshing to see the 79-year-old Buffett taking such a long view. But the fact is that Berkshire Hathaway is not going to exist in anything like its present form in 100 years’ time. It’ll probably last no more than 10 years after Buffett dies before it’s broken up into various component parts. And when he gives quotes like this to Charlie Rose, it seems as though he’s somewhat in denial about what his legacy is really going to be.

The minute that Buffett dies, Berkshire becomes a large conglomerate, and will trade, like all conglomerates, at a discount to its sum-of-the-parts valuation. Sooner or later, Berkshire’s CEO will be persuaded to monetize the difference, and the storied company will come to its natural end. That’s no bad thing: it’s intrinsic to the nature of capitalism, which Buffett loves. But it does mean that buying companies on a 100-year time horizon is somewhat unrealistic.

Comments

[Roger Knights]

"it seems as though he’s somewhat in denial about what his legacy is really going to be. The minute that Buffett dies, Berkshire becomes a large conglomerate, and will trade, like all conglomerates, at a discount to its sum-of-the-parts valuation."

That's telling it like it is.

2009 Nov 17 09:40 PM

[Moon Kil Woong]

Buffet likes to make deals. The only difference between him and Trump is he makes profitable ones as oppopsed to ones that bankrupt himself like Trump does. Also all his money didn't come from his billionaire developer dad.

His legacy will always make others pale in comparison regardless of the conglomerate that remains after his departure.

I don't think Santa Fe will tanish his reputation as much as his recent foray into getting his share of cheap money from the government's money funnel to financial institutions. Clearly he saw the free money lunch there. The sad fact is of all the people he didn't need to stoop that low to find value. Nothing wrecks a reputation like getting in bed with a snake. Especially when it's the biggest snake on the block, otherwise known as Goldman Sacs.

2009 Nov 18 10:33 AM

[DownOnMyLuck]

Another possibilty is that the new management could do a 2,000:1 stock split and start paying a dividend. The market value could increase.

2009 Nov 18 03:32 PM

[Dave Shafer]

Really, and you sit on the board that will be making that decision?.....
Thought not....

2009 Nov 18 04:53 PM

[Juliet]

Agreed with DownOnMyLuck--After WEB goes home to that Big Capital Allocator in the sky, it will be a very long time before Sokol (or, whomever) sells it for parts. First they will break out the fat divvy.

Maybe Felix is shorting the Bs again?

2009 Nov 18 05:02 PM

[jimmy46]

The minute that Buffett dies, Berkshire becomes a large conglomerate, and will trade, like all conglomerates, at a discount to its sum-of-the-parts valuation.""""

That might happen, who knows.
But Berk has always been worth more than the sum of its parts,
not just because Buffett is a great asset allocator,
but because its very deep pockets allow it to make insurance bets than no one else can.
Bets that on average are extremely profitable.

A small or medium asset insurance company should always play it safe, which means small profits.

2009 Nov 23 03:57 PM

[U338129]

This is the most naive statement ever, "Sooner or later, Berkshire’s CEO will be persuaded to monetize the difference, and the storied company will come to its natural end."

You do realize that the company will be run by a group consisting of his family, close associates like Gates, and long-term insiders like Sokol right? You do realize that the company is real, it has real assets, and it has real cash on the books right? You do realize that you have to be one hell of a strong company to be able to buy an entire railroad company right?

People used to predict the demise of Wal-Mart when Walton passed away; but, the opposite has happened, it has become even stronger. Berkshire will still have the insurance float, it will still have money from its subsidiaries coming in (to include a major utility company and now a railroad company), and it will still be receiving dividends from all of the stocks it owns in great companies. Whether Buffett is there or not, that money will still be coming in year after year and put to use to a continuous compounding effect. The "next guy" may or may not be as great a capital allocator as Buffett/Munger, but I'm sure that person will do "ok" given the opportunities that will present themselves and I'm sure that the list of candidates that Buffett has under wraps as replacements have a similar mindset as he does when it comes to risk management/capital allocation for long-term results.

Again, your entire article and the idea that Berkshire will simply vanish after Buffett is completely naive.

2009 Dec 01 01:24 PM