economics

January 20, 2010

You can soon own a little piece of Buffett

Filed under: Uncategorized — ktetaichinh @ 12:02 am
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NEW YORK (Fortune) — It’s about to get a lot cheaper to buy shares in the company run by America’s most celebrated investor, Warren Buffett.

Shareholders of Buffett’s Berkshire Hathaway (BRKA, Fortune 500) are scheduled to meet Wednesday to approve a stock split covering one class of Berkshire shares. The split would cut the price of these shares to around $66 each, from a recent $3,300.

The move, which was approved last year by Berkshire’s board and is expected to be cleared by shareholders as well, could attract some new investors by eliminating the sticker shock long associated with Berkshire shares.

Berkshire has two classes of stock: Class A shares that recently traded for around $98,500 each, and the Class B (BRKB) shares that are to be split 50-for-1 following shareholder approval. The Class A shares won’t be affected by Wednesday’s vote.

Berkshire asked shareholders to approve the split so it could offer Berkshire shares to all investors in Burlington Northern (BNI, Fortune 500), the railway company Berkshire agreed in November to acquire for $34 billion in cash and stock. The deal is scheduled to close early this year.

Splitting the Class B shares will make it cheaper for investors to take Buffett’s side in the Burlington bet, which he called an “all-in wager on the economic future of the United States.”

The split would mark the second time in the company’s 55-year history that it has changed its stock structure to make some of its shares more affordable.

In 1996, Berkshire sold the cheaper Class B shares to the public for the first time. The company said it made the move in response to the plans of some investment companies to sell products that would let investors invest in Berkshire without paying the full price of a Class A share, then around $35,000.

At the time, the value of the Class B shares was fixed at 1/30th of a Class A share. That would change to 1/1,500th with Wednesday’s vote. Class B shares also carry reduced voting rights and can’t be converted into Class A shares.

Buffett warned in his 1996 letter to shareholders that the proposed “Berkshire look-alikes” from other investment firms would have tried to “entice naive small investors and would have charged these innocents high fees and commissions.”

Buffett said that the 1996 offering, which raised $565 million for Berkshire, was “generally successful” in drawing in shareholders who would hold the stock for the long term. He said it added about 40,000 shareholders to Berkshire’s rolls.

Trading in the Class B shares was light initially, with daily volume rarely rising above a few thousand shares through 1997 — a fraction of the trading in the more expensive Class A shares.

But as Berkshire began using the Class B shares for acquisitions in the late 1990s, trading picked up. Average daily trading volume in the Class B stock has exceeded a million shares in every month since December 2005. Trading in the pricier Class A shares, by contrast, has only rarely exceeded 300,000 shares. To top of page

VERY UN-BUFFETT

Buffett, 79, had never split Berkshire’s stock. One of the world’s most respected investors, Buffett reasoned in the past that splits could attract speculators rather than the long-term investors he prefers.

Buffett controls 31.6 percent of the voting power of Berkshire stock and advisers said it was surprising that the so-called “Oracle of Omaha” would dilute the value of his pricey shares.

“Buffet has never been someone to split the stock. But when they launched the B shares, it was a de facto split, so it is really moot,” said Richard Steinberg, of Steinberg Global Asset Management Ltd in Boca Raton, Florida, who manages about $470 million, including over 4 million in Berkshire shares.

Jeffrey Saut, chief investment strategist at Raymond James in St. Petersburg, said the “un-Buffett-like” split followed the move to buy BNSF at a premium — a move Saut called equally out of character for an investor known for exemplifying the creed of buying low.

“I think he was just sitting on too much cash. There is talk he will pass the torch and I think he was worried the heir apparent could invest in the wrong thing,” Saut said.

While most advisers thought the split would be a boost for the stock, others thought the move could attract the kind of investors that Buffett had long worried about.

“History shows that stocks that are split to achieve a lower price are degraded,” said Frank Pavilonis, senior market strategist at Lind-Waldock, a retail brokerage firm, in Chicago.

Increased demand will likely lead to more analysts at Wall Street firms and other major brokerages to cover Berkshire, which has received little attention from research analysts. The issuance of “buy” ratings could help reinforce demand, advisers said.

“Some people feel more comfortable when they see things in writing and can get reports from several different firms,” said Lancz.

Berkshire Shareholders All Aboard for Split

Natasha Gural, 01.20.10, 03:50 PM EST

The billionaire remains bullish on the U.S. economy but warns that the BNSF deal may not produce fast results.

Shareholders of Warren Buffett’s Berkshire Hathaway Inc. on Wednesday approved a 50-for-1 stock split that puts on track the Omaha billionaire’s $26 billion purchase of Fort Worth, Texas-based Burlington Northern Santa Fe Corp.

The vote for a 50-for-1 split applies to the firm’s Class B shares, which will begin trading Thursday on the New York Stock Exchange. The more coveted and costly Class A shares are not being split. Berkshire is paying $100 in cash and stock for each outstanding Burlington Northern share.

“If we hadn’t done this there would have been justification of the criticism that a big shareholder got a different deal than a small shareholder,” the Berkshire chairman said.

Buffett divested the firm’s equity stakes in Omaha, Neb.-based Union Pacific ( UNP news people ) and rival Norfolk Southern Corp ( NSC news people ) of Norfolk, Va., as part of his purchase of Burlington Northern Santa Fe ( BNI news people ), his biggest-ever acquisition. Berkshire is buying the 77.4 percent of Burlington Northern it does not already own.

Buffett told shareholders that Berkshire Hathaway ( BRK news people ) would invest $20 billion more than depreciation over the next decade in its rail and utility holdings as the U.S. economy’s recovery chugs along.

called “Oracle of Omaha” would dilute the value of his pricey shares.

“Buffet has never been someone to split the stock. But when they launched the B shares, it was a de facto split, so it is really moot,” said Richard Steinberg, of Steinberg Global Asset Management Ltd in Boca Raton, Florida, who manages about $470 million, including over 4 million in Berkshire shares.

Jeffrey Saut, chief investment strategist at Raymond James in St. Petersburg, said the “un-Buffett-like” split followed the move to buy BNSF at a premium — a move Saut called equally out of character for an investor known for exemplifying the creed of buying low.

“I think he was just sitting on too much cash. There is talk he will pass the torch and I think he was worried the heir apparent could invest in the wrong thing,” Saut said.

While most advisers thought the split would be a boost for the stock, others thought the move could attract the kind of investors that Buffett had long worried about.

“History shows that stocks that are split to achieve a lower price are degraded,” said Frank Pavilonis, senior market strategist at Lind-Waldock, a retail brokerage firm, in Chicago.

Increased demand will likely lead to more analysts at Wall Street firms and other major brokerages to cover Berkshire, which has received little attention from research analysts. The issuance of “buy” ratings could help reinforce demand, advisers said.

“Some people feel more comfortable when they see things in writing and can get reports from several different firms,” said Lancz.

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