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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214645  
Subject: Those folks who sold... Date: 12/12/2012 3:12 PM
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I've been thinking about those people who sold 9200 shares back to Berkshire at $131k.
First off, good for them! It's nice to make money.

But on a more incisive note...
The press release notes "The Board of Directors authorized this purchase
coincident with raising the price limit for repurchases to 120% of book value."


"Coincident" is an interesting term, no doubt carefully chosen.

Imagine a delay of few seconds one way:
Given that the buyback was at a price materially lower than 1.2x, if I
were one of the heirs of that estate I'd feel a little hard done by
since the shares were sold to Berkshire at a price (1.173x book) below
what the price would certainly have been a few minutes later.
Goldman Sachs would probably take the whole block at $133000-134000 right now.
That's on the close order of $25 million difference.
Thus, to be considered "fair", the buyback had to be before the 1.2x threshold change.

Imagine a few seconds the other way:
Berkshire management has stated clearly that they would not purchase shares
from shareholders at prices above the then-prevailing NYSE level, and only
below 1.1x book, and this particular buyback was materially above both.
Thus, to be considered "fair", the 1.2x threshold change had to be before the buyback.

Some delicate ethical dancing in there!
Not pointing a finger, just noting it's a tricky situation for them.
I'm glad there was a trading halt.

Jim
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Author: joeuu Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196848 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 3:17 PM
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Can be pretty dicey for sure. Hasn't this exact scenario you mention what WEB has always dreaded, seemingly taking advantage of selling shareholders?

Joe

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196853 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 4:03 PM
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"Coincident" is an interesting term, no doubt carefully chosen.

Thinking about this a bit more, I'm pretty sure that the catalyst for
the change in buyback threshold was the repurchase, certainly the proximal cause.
That in turn is a result of the death of a particular individual.
It seems very unlikely to me that the threshold change would have taken place this quarter otherwise.
This one death may have had more influence on the stock price than
another well-publicised one that people have long worried about.

Will we see another upwards revision to the multiple the next time
another long-time shareholder sells a block to Berkshire?

Jim

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196857 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 4:21 PM
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Thinking about this a bit more, I'm pretty sure that the catalyst for the change in buyback threshold was the repurchase, certainly the proximal cause. That in turn is a result of the death of a particular individual. It seems very unlikely to me that the threshold change would have taken place this quarter otherwise.

This is likely true and only reinforces the downside of having a specific limit to begin with. It creates all sorts of quirky problems such as the sequencing of the change in limit vs. the repurchase of the shares in question. Under a normal repurchase program without any specified criteria, Buffett could have purchased those 9,200 As without any press release or disclosures until the 10-K is filed 11 weeks from now! Imagine how many more shares could have been repurchased at better prices without the need for this specific disclosure. He could also have been buying back boatloads of shares for almost the entire past year.

Since we now know that the 1.1x limit was not "set in stone" but subject to periodic revisions, I am hopeful that the annual letter will specify some underlying rationale for the chosen limit and how it may evolve over time. Of course, providing that rationale would also expose Buffett's thought process regarding intrinsic value to an extent that may not be desirable. Yet another reason to dispose of the specific limit completely. To be replaced with a simple statement that shares will only be purchased at prices well under a conservatively calculated intrinsic value. If we cannot rely on future CEOs to avoid expensive repurchases of Berkshire stock, we have MUCH bigger problems to deal with. Buffett has to have enough trust in his immediate successor AND in the culture and legacy he is leaving to be confident that the company doesn't need artificial handcuffs to prevent bad capital allocation in the future.

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Author: SSAFTY One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196858 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 4:22 PM
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>>Thinking about this a bit more, I'm pretty sure that the catalyst for
the change in buyback threshold was the repurchase, certainly the proximal cause.<<

Assuming you are correct on the catalyst, would you care to speculate on why WEB chose to accommodate this particular estate? It seems out of character. He never seemed to worry about the stock price in the past and here he seems to have boosted the floor prior to year end, regardless of what happens in Congress.

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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196859 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 4:23 PM
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Berkshire management has stated clearly that they would not purchase shares
from shareholders at prices above the then-prevailing NYSE level, and only
below 1.1x book, and this particular buyback was materially above both.



As a distinguished and admired Mediterranean investor once asked, "What does the contract say?"

[Sept 26, 2011:] Our Board of Directors has authorized Berkshire
Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10%
premium over the then-current book value of the shares.



I certainly understand that to mean that repurchases won't happen above 1.1x book, but I'm not sure a lawyer would agree, at least not based on the above text. She might say that the autorization is limited to repurchases which occur at or below 1.1x, but that explicitly authorizing repurchases at one price level does not necessarily prohibit repurchases at higher prices (although such repurchases would not have been authorized.)

Looking quickly at NYSE and SEC rules, I can't find anything that says you absolutely have to have board authorization to do a repurchase.

In any case, as you say, the simultaneous authorization solves the problem nicely, if there was one.

Regards, DTM

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196863 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 4:45 PM
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Assuming you are correct on the catalyst, would you care to speculate on
why WEB chose to accommodate this particular estate? It seems out of character.


Actually I think he always liked the idea of buying shares directly from shareholders,
it's just that the right situation doesn't come up often: the person
has to be wanting to sell, the block has to be materially sized,
the price has to be high enough to be fair and low enough to be a good deal,
and (more recently) has to be within the bounds of the stated buyback policy.

In this case I'm guessing it was simply a matter of their wanting to
sell and his being well aware that the existing 1.1x line was a margin of
safety on top of a margin of safety so it could be relaxed a bit and
still be more than adequate to meet the "comfortably below intrinsic value" goal.
By doing both at once, both situations are improved, so why not?

Jim

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196865 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 5:10 PM
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Here's one more interesting question to consider:

Assume that the increase in the 1.1x buyback level was in fact due to this opportunity arising from the death of a large shareholder and that the limit would have remained at 1.1x in the absence of this situation.

Change the scenario: Assume this large shareholder didn't pass away recently but instead outlived Buffett and then passed away once a new CEO is in place at Berkshire.

Assume that a similar situation then occurred after the large shareholder's death: The executor of the estate approaches Berkshire's CEO and Board and the valuation of the company was somewhere around 1.15.

Question: Would the new CEO and the Board have been able to increase the buyback limit from 1.1x to 1.2x book value without a media circus related to whether Buffett's criteria had been weakened? Imagine the number of "Would Warren have done this?" articles. There would be suspicion, second guessing, etc.

When Buffett changes the criteria himself, the move is almost universally accepted as a principled one. Obviously he believes that 1.2x book is still way below any reasonable IV and has chosen to modify the prior limit. All well and good. But his successor could never do this without questions arising.

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Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196876 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 8:23 PM
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Of course, providing that rationale would also expose Buffett's thought process regarding intrinsic value to an extent that may not be desirable.

It may be undesirable only if you are still accumulating.

Otherwise, if Buffett came out and said BRK.A is worth $200K in IV, why would that be a bad thing? He has already said it's at least 1.2 * book.

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Author: TMFHockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196878 of 214645
Subject: Re: Those folks who sold... Date: 12/12/2012 10:32 PM
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The other major beneficiary of the increased floor is the Gates Foundation. Now, with their regular monthly sales process their minimum sales price has increased. More money to do good! Nice bonus!

Hockeypop

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Author: dbareham Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196929 of 214645
Subject: Re: Those folks who sold... Date: 12/13/2012 9:54 PM
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Query,
Assuming that the buy-back was from Flight-Safety's heirs;
How much income has Flight-Safety generated since it was purchased for stock by brk.
I would think that this purchase using stock would prove that cash is the better medium of exchange.
Cash value seems to depreciate; BRK stock appreciates.
Issuing stock to get the purchases done is detrimental to BRK as this buy-back seems to indicate, but I understand that getting the deal done is what drives the use of stock.
If BRK had been able to pay all cash for the purchase of flight safety, this buy-back would have not been necessary. Could of Would of Should of!!!
Paying up with cash is the better choice.

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