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General Re: Not Berkshire's Best Acquisition

Berkshire Hathaway has finally settled with the SEC regarding General Re, a can of worms acquired in 1998.

How did the acquisition come about? On the day the deal was announced, in August 1998, BRK/A stock had advanced some 60% from December 31, 1997 levels, while GRN stock had advanced only 10%. So the 50% premium that BRK offered in as stock-for-stock deal merely restored the status quo ante. But GRN stockholders jumped at it, because it allowed them to participate in Berkshire's gains.

Mr. Buffett is reportedly a very good judge of people he has just met. His "mistakes" come with people he has known for sometime, with whom he lets down his analytical guard and allows human factors to come into play. Mr. Buffett thought he knew the then-chairman, Ron Ferguson, better than he did. And as it turned out, he had misjudged Ferguson's subordinates as well. (He made the same mistake with John Gutfreund and his Salomoners a decade earlier. )

So why did Berkshire do the deal? The company wanted a dominant position in reinsurance, although it was more than capable of outcompeting General Re (as it ultimately did with Safeco, a former property-casualty holding). The other reason was to dilute Berkshire's stock holdings with Gen Re's bond and cash positions. These were not good reasons to make a pact with the devil.

This deal was a signal for me to sell all the BRK/A shares held in non-taxable accounts (such as IRAs), although the "taxable" shares were kept. That was because 1) Berkshire stock had gotten ahead of itself, and 2) because the overvaluation was starting to cause people to do questionable things. Even after twelve years, the "A" shares are not much above their 1998 peak of about 84,000.

And the IRA? Up over three times during that span.

Still long (taxable) BRK/A shares.