I know we all admire
, at the very least on the classical American scale of net worth per pound.
But the immense momentum of his success, his aw-shucks Andy Griffith persona and the sheer size of
have enabled him to do deals that are not necessarily friendly to the seller's shareholders.
I will mention briefly, without detail, his purchases of "friendly" convertibles and preferreds in firms like
(now a unit of
), which at the time of issuance seemed to be wonderful sweetheart pieces of paper that were offered exclusively to Berkshire in a noncompetitive fashion in order to ward off the occasional bully who was also attracted to the prospect of a bargain.
And yes, these investments did turn out wonderfully for the shareholders in the long run, but the point is Mr. B. was able to invest in a lower-risk, higher-yielding way than what was afforded to lowly folks like you or I.
What I am getting to here is, what's really in it for the current holder of
now that the excitement over the deal is over and he or she is giving up shares at what appears to be an 18% premium to General Re's closing price on Friday? While better than a sharp stick in the eye, would you be better off to keep your GRN or to latch onto the Berkshire wagon at an 18% premium?
First off, you have to ask yourself, "What does the world's smartest man know that I don't know" as you sign the tender papers. A few years back, we had a similar experience with
, in which we owned wads of stock.
Geico was chugging away in the mid-50s back in mid-1995 when we awoke to a $71 bid for the 49% that Berkshire did not own. Again, better than catching your hand in the car door, but are we better off today for having accepted the $71? The answer is no, although "who cares" also deserves mention because Berkshire owned 51% and who the heck were we to stand up to The Great One?
Geico earned $2.97 a share in 1994 before capital gains and losses, had a wonderful strategic position in the industry, was run by a terrific insurance guy and a terrific investment guy who is probably the heir apparent at Berkshire and was very well capitalized. In other words, doing fine.
If we grew Geico's earnings per share by 15% annually, Geico would be earning about $5.20 this year and would probably be selling at 20-ish times earnings, a premium to
and a discount to
, the independent leaders of the auto insurance pack.
Using a discount rate of 10% (higher than Buffett's), our Geico had a present value as we tendered our stock at $71 on Jan. 2, 1996, of about $82.
I will add that these numbers are
conservative if you read the last two Berkshire annual reports, as Mr. B. crows that Geico has grown policies and premiums at record levels and their combined ratio has dropped nearly 800 basis points, an extraordinary performance that would have blown the doors off the hypothetical earnings mentioned in the previous paragraph. In sympathy with the
, at least we were bagged by the best.
It seems to us that General Re is a very similar story, with an interesting distinction in that you get Berkshire stock. General Re is one of the class acts in the financial world, is very well managed and has the scale, international presence and financial discipline to succeed very well on its own. Berkshire is paying about 21 times the General's $12.85 EPS expected in 1998, which again is fair, but not exceedingly generous.
But Berkshire does not have to be generous, because . . . it's Berkshire Hathaway! The hook here, of course, is that you are not completely taken out of the picture. You get to participate in the future growth of General Re plus enjoy the supposed synergies with Berkshire's mass, and at the least you will get an uptick on the investment side.
You also get the relief of not dealing with the quarter-by-quarter earnings reported-versus-expectations nonsense, as the Omahaian has effectively communicated that those are details not worth trifling with.
Using a 10% discount rate again, the numbers are actually somewhat similar to those of Geico. If General Re can grow earnings at 14% annually on its own, then you are better off staying solo in my opinion, but again you don't have the choice.
While somewhat diluted by the stock-vs.-cash nature of the deal, the question you still have to ask yourself is, what does he know that you don't? And do you want the stock of a man who has spent his whole life preaching against stock acquisitions, except in cases where the intrinsic value of the stock being offered is less than the price at which it is selling?
And do the Rules of Large Numbers finally begin to set in at Berkshire, both in its underlying portfolio (a big chunk of which comprises arguably some of the most overvalued stocks in the
) and the ability of its stock to grow at a faster rate than underlying fundamentals?
Maybe all this is obvious in that he is worth $30 billion-plus precisely because he does not overpay. But in his own words, or words close to it, once you find a terrific business run by smart people, you want to hold onto it as long as you can.
You certainly do not want to sell a great business when it appears "fairly valued." It's very easy to be precisely wrong and the risk of doing something worse with the proceeds is very real. The mistakes in my career are a litany of selling things like
too soon, when it appeared "fairly valued." That's why we were ticked off with Geico and while we don't own it, I expect General Re holders feel the same.
Jeffrey Bronchick is a portfolio manager and principal with the investment firm Reed Conner & Birdwell. At the time of publication the firm was long American Express, though positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reed Conner & Birdwell is based in Los Angeles and manages about $1 billion of assets for institutions and taxable individuals. Bronchick's column, The Buysider, appears every Tuesday on TheStreet.com.