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Is Berkshire Hathaway A Buy As It Acquires Alleghany?

Apr. 04, 2022 11:47 AM ETBerkshire Hathaway Inc. (BRK.A), BRK.BAAPL, AXP, CVX, D, MKL, OXY, UNP78 Comments
Jim Sloan profile picture
Jim Sloan


  • At 1.5% the size of Berkshire, Alleghany is hardly a game changer, but its fit within reinsurance and manufacturing/consumer units make it a highly desirable acquisition.
  • Deploying low-yield cash makes the deal accretive, and Alleghany CEO Joe Brandon is an old Buffett friend who will add depth to Berkshire's insurance businesses.
  • Berkshire's ongoing diversification, decentralized operational structure, and centralized capital allocation provide assurance of continued outstanding returns.
  • At this point Berkshire stock has beaten the S&P 500 on all time frames, deservedly so, despite the past decade of tech growth and outperformance.
  • Investors new to Berkshire might build a position in stages, while looking for an opportunity to buy heavily in a major market downturn.
Conference On Issues Affecting U.S. Capital Markets Competitiveness

Chip Somodevilla/Getty Images News

Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) goes from strength to strength. Over the past few months, things have been working in its favor at every level, starting with excellent operational results. At the same time CEO Warren Buffett has managed to deploy capital in

This article was written by

Jim Sloan profile picture
I am a retired professor, a retired investment adviser, and currently a private investor and full-time tennis pro. I bought my first stock in a custodial account in 1958. I am a student of history, particularly military and economic/market history. The intellectual passions of my retirement years have been markets, mathematics, and quantum theory. Recently I have found myself reading book after book on the thoughts and feelings of animals, and I believe they are subtly influencing some of my views. I have a cat I like a lot. I like to travel. I served in Vietnam.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BRK.B, BAC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (78)

Mountain Marmot profile picture
Any knowledge of recent buybacks in the area of the recent dip below $300?
@Mountain Marmot

next 10Q will give buyback expenditures by month
capitalallocator profile picture
So Buffett paid $ 11 B for Y and acquired float of $ 14 B. OK it was Berkshire. Forget no money down deals, Buffett & Berkshire got 'cash back' upon closing.....

simplevalue274 profile picture
The go shop peroid ended last night. I wonder when we will hear any news regarding the deal.
CapVandal profile picture
"Swapping Berkshire shares for Gen Re was a mistake Berkshire has been determined not to repeat."
Buffett may have said something along these lines. But when that deal was done, BRK's earnings weren't heavily impacted by non insurance/equity holdings. They didn't own utilities or railroads.
Further, the biggest change from the merger was the dilution of BRK's concentrated stock portfolio at cyclical highs without selling any holdings. At the time, he couldn't openly sell shares in KO or AXP without triggering the market and without paying large capital gains taxes.
You would have to carefully review the numbers to come to a conclusion, but there was more to the deal under the surface than vanilla M&A. And this is more of a historical footnote than anything.
Briar profile picture
@CapVandal Cap, I think Buffett’s lesson came from Berkshire’s purchase of Dexter Shoe for shares. Berkshire effectively swapped its potential future compounding for Dexter’s, which shortly, because of foreign competition, went down the drain. Buffett has cited that purchase as one of his worst: it has cost shareholders billions in compounding. Of course, I suppose Warren could have immunized the loss of compounding buy repurchasing offsetting Berkshire shares. I have wondered why he didn’t do that.
3WallPaul profile picture
@Briar I heard that story in person. Thanks 4 that, now I don’t have to rummage through notes.
CapVandal profile picture
Alleghany's insurance business is largely sold through brokers and agents vs BRK, which is primarily a direct writer. There is a good description of the business in y's 10k. As such, there isn't much room for synergies. At a modest premium to book value, there isn't much risk to the acquisition.
In terms of an overall theme, BRK is unusual for its highly decentralized management strategy rather than synergies between businesses. You have to assume that BRK knows what it is doing as far as insurance acquisitions, but there is a reason Buffett has avoided sales intermediaries for decades.
More of a good enough business at a fair enough price.
Professor thank you for yet another highly informed, highly informative article.
Briar profile picture
Another fine article, Jim.
One advantage Alleghany might have being part of Berkshire is being able to utilize Berkshire’s authorization since the mid ‘80s to hold concentrated, non-fixed-income securities within its insurance capital. Little discussed is that National Indemnity actually owns BNSF. I assume the Apple shares are distributed among the various insurance entities. I think this is the synergy you refer to that makes Berkshire a substantial financial fortress, not necessarily the synergy of business operations: See’s has little synergy with Berkshire’s many other holdings, but it has produced, according to Buffett a few years ago, over a billion dollars of shareholder wealth.
Kershaw profile picture
Enjoyable article Jim. I've always had the mindset that owning a piece of Berkshire is like holding shares of the best run mutual fund ever to exist. BRK.B is still attractive at FV but fortunately I've always been disciplined enough only to add during market downturns. I can't always say that for other investments.😀
I'm happy to own 11.5% of wealth in BRK-B will wait for a big dip to buy any more (assuming I have free cash to do so). Curious why BRK was down so much today? Not that it's a big deal or anything, just noticed it when I checked my portfolio. Also what is going on with transports sector I noticed all the railroad stocks took a 4-6% hit on Friday, not sure about today.
simplevalue274 profile picture
@clrodrick Yeah I noticed that as well. Seems to trade off for no reason and also rally for little reason as well. Appl has actually rebounded strongly while brk has sold off, go figure. Just hope they keep buying back stock and the Y deal closes. Would have liked to see a breakup fee in the deal. Imagine if buffett didn't sell any banks during teh pandemic and just bought back stock. He had Gates in his ear which increasingly like a poor person to get guidance from.
@clrodrick I’ve been a Berkshire shareholder since 1978. Berkshire is currently approximately 25% of my total investable assets.
@simplevalue274 One of the reasons why he had to sell the banks so he could get his BAc holding raised to up to 25 % over the 10 % threshold that the fed usually requires. The Richmond fed allowed the BAC increase. The season for WFC sale was that he was angry for firing the most recent CEO because he wasn't part of the issues that plagued Wells Fargo too. He was brought in to replace the previous disgraced ceo . Then he was made to be fired by the board from pressure from the FED ,
very good article IMO. I like and own BRK/B.
All Things Risky profile picture
Great Read, and like the conversation it created in the comments!
thirdcamper profile picture
Jim, a column from you asking if Berkshire is a buy is like a column by Buffett asking whether Coca-Cola is a good beverage.
Gary Kime profile picture
@thirdcamper a 20% annualized return for greater than 50 years probably backs up his thesis!
thirdcamper profile picture
@Gary Kime Don't get me wrong, I own it. I was just giving Jim some friendly joking.
Jim Sloan profile picture
@thirdcamper Of course.
i've invested nearly full-time since retiring in 1988, shortly before buying my 1st brk share. NO ONE i read knows brk or expresses himself as well as you...not even close! as much as i've studied brk for 3 1/2 decades, i ALWAYS learn lots fr your excellently researched, chock-filled with juicy info articles...for that i'm super grateful and thank you very much...PLEASE...continue to bless us with your superior work!
Jim Sloan profile picture
@nate311 Too generous. Thanks.
I estimate BRK.B fair value at $368.
Jim Sloan profile picture
@cegibbs That's as good an estimate as anybody's. I said $360 a few months ago.
@cegibbs holy crap...right on my #...now i need it to come in 10%, my margin of safety. since my initial purch in the early 1990s and additional buys the times it's been stupidly unloved, it's grown to a wonderfully delicious 1/3 my net worth. thank you warren for teaching me so much about investing...and life...and for growing my net worth beyond anything i could've imagined!
If you mean by fair value a price at which a buyer and a seller can agree to a sale, then If I had around $814 Billion laying around I would love to buy all of Berkshire at a price of $368. Just do the math out 7-10 years at an 8-10% increase in value (these are numbers the author suggests in this article) you'll find Berkshire is easily worth over a trillion dollars. Its intrinsic value is well north of $400 (somewhere in the range of $420-460) at those sorts of value increases. Using a simple back of the envelope calculation growing at 10% per year shares would double in value in 7 years. So if book value was $228.41 at the end of 2021, it would be $456.82 at the end of 2028. Using a ratio of 1.5xBV the price would be $685.23 or a market cap of $1,518 Trillion. A pretty good, safe return on the $814 billion I paid. The only problem is I don't have that kind of money laying around, so I'll just wait for opportunities to buy a few hundred shares, if I can get them in the high $200 hundreds or even low $300 hundreds.
@Jim Sloan Jim, this is off topic. I can't help but notice that the Ukraine conflict sorta resembles the effects of firepower outmatching combined force tactics just like WWI. The only reason I brought it up is that I noticed you were a student of military history. Forgive me for being a bother. Great read, always read your and enjoy your work.
Winnertakesall profile picture
The Alleghany CEO should have taken it to shareholders first. I don't think the deal would have happened and the CEO would have been fired.
Jim Sloan profile picture
@Winnertakesall Maybe, but Alleghany is family owned somewhat like Markel - the Kirby family. What surprised me was that they accepted cash on which they will pay heavy cap gains taxes. There may be a story behind the story. The people who may contest are a minority. Alleghany is very valuable as a Berk acquisition but worth much less to others, maybe what it was trading for before the bid. I think Berkshire gets it at this point. It's awfully large for Markel and not of equivalent quality. If anybody topped Berkshire's price materially he would say OK, goodbye, and they would probably regret it. Oh, and the CEO came on to run the insurance side and now is responsible for everything with a 13 person central HQ. Firing him would be a disaster.
Berkshire is always a buy.
@Achman08 except those times it's fully or overvalued...buffett: "Never count on making a good sale. Make the PURCHASE PRICE SO ATTRACTIVE even a MEDIOCRE SALE PROVIDES GOOD RESULTS."

well said
Thanks Jim great stuff!
@Jim Sloan Fairly new to BRKB, and in the process of establishing a position. Nice that BRK has outperformed the S&P 500 recently; however, your thoughts on whether this out performance is more attributable to share buy backs than other reasons would be appreciated? Thank you.
@JCCIII Buybacks, value back in favor would be my guess. Welcome to the club I have owned in since 1999 over time you will be happy with BRK. I bought it for 3/4 year I think every quarter until it actually went up so stay patient!
Jim Sloan profile picture
@JCCIII Buybacks have helped every per share measure but Berkshire just chugged ahead and showed that it is good in a growth era with higher rates but is also pretty good as a defensive stock.
Jim Sloan profile picture
@Valuestocks007 Buybacks are always a good thing in my view. as long as the cash you use has lower return and return prospects than the ROE of the company.
Gary Gambino profile picture
Great as always, Jim. I’ve been saying for a while that Berkshire should start changing the complete “hands-off” policy toward its subsidiaries. For Allegheny, that means at a minimum Buffett/Todd/Ted need to take over their investment portfolio or else Buffett needs to make clear to Brandon that he should get less conservative with the fixed income / equity balance. That is the best way for Berkshire to get value out of the merger at the price they paid. Actually consolidating their underwriting operations with existing Berkshire subsidiaries is probably not happening as long as Warren is around.

As to OXY, I chuckled a bit when you said Warren waited until the opportunity presented itself. He was selling the common stock in the teens in 2020 and now he is buying in the $50’s? If he was that confident about the medium term prospects of the oil industry, he should have been buying hand over fist no later than the second half of 2020 once it became clear the world wasn’t ending. Anyway, that will be the subject of my question for this year’s annual meeting should Becky decide to ask it.
Jim Sloan profile picture
@Gary Gambino My assumption is that the fixed side of Alleghany's portfolio will be replaced ASAP unless status as a separate entity in some way prevents it. It's about the same ratio as at Markel despite the fact its equity side is the outstanding Tom Gayner portfolio and they have the same recent fixed losses versus equity gains. I'll see Tom in a few weeks and I plan to ask about the constraints at Markel.
I alluded briefly to Buffett buying then selling then finally buying, as he also did with Chevron. I think I know how Buffett was thinking during that worst of 2020, and while his ex post errors provided gotcha moments for Barron's I think he wanted to sweep his mind clean of risks while assessing more fundamental threats to Berk businesses. There was a very real question as to whether OXY could survive and prosper. A decision tree ala HBS would weight the risk heavily for all but a plunger. Merely decent oil prices didn't mean prosperity for OXY. By the time he was buying he could look ahead to numbers which made it clear that OXY would quickly wipe out debt from the deal and then have very solid cash flow even if the price of oil was cut in half. That's very Buffett and one of the reason he has quite a few mistakes but none that risked anything too terrible. I did the same thing with OXY, by the way, in a position about as small on my scale as his actions were on his. I would argue that OXY was a better buy at 40 than it was when under 10. Not for Carl Icahn, of course, but his payoff would have been picking the bones.
@Jim Sloan more sloan insightful brilliance!
@Jim Sloan
I know what a decision tree is but what does "HBS would weight the risk heavily for all but a plunger" mean?
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