There are some well-kept secrets in the financial world. For example, there’s the identity of the person or people who designed Bitcoin under the pseudonym, Satoshi Nakamoto. Then there’s the identity of the parties responsible for the frequent dumping of billions of dollars of gold futures contracts on to the market without regard for maximising price. Another one is Warren Buffett’s successor as Chief Executive Officer Berkshire Hathaway.
Besides his advancing years, he’s 87, there are other signs that curtain is coming down on the era of the world’s most successful investor. As we noted in August in “The Value Of Lunch With Warren Buffett Plunges 22%”.
The winning bidder in legendary investor Warren Buffett’s annual charity auction has pledged $2.68 million for the privilege of eating lunch with the billionaire investor…While the sum is far greater than the $25,000 paid in 2000 – the first year Buffett held the fundraiser – it’s about $800,000 shy of the record sum of $3,456,789 paid in 2012 and 2016.
By his own admission, Buffett has also found it increasingly challenging to find “value” in keeping with his investment style which he modelled on an earlier doyen of value investing, Benjamin Graham. That’s not Buffett’s fault, it merely reflects the longevity of the latest iteration of central bank bubbles.
Speaking to the usual throngs of shareholders as Berkshire’s AGM in May 2017, Buffett admitted that.
“If I die tonight, I think the stock would go up tomorrow.”
He wasn’t joking, the world’s greatest capital allocator was merely acknowledging that the market would likely price the parts of his very disparate conglomerate higher than the whole. “It would be a good Wall Street story”, he was reported to have said.
Bloomberg Businessweek has published an article on Buffett and Berkshire Hathaway arguing that the pressure to break up the company will mount after he steps down. Buffett’s successor will be critical if that is to be prevented…and Bloomberg thinks it knows his identity. For the time being, while Buffett remains in situ, nothing is going to change.
The glue is Buffett, who’s argued persuasively for decades that this hodgepodge makes sense. His market-beating returns have helped: $100 invested in Berkshire in 1964, when he began aggressively buying shares to take control, would be worth more than $2 million today.
Nothing of the sort is likely to happen while Buffett is there. He’s still the controlling shareholder, Berkshire is his life’s work, and he doesn’t want it torn apart by investment bankers or activist investors. To slow that process, Buffett assembled a board that backs his approach, and after his death he’ll leave his remaining shares to charities run by family and friends who know his wishes. But the pressure to dismantle his creation will mount—eventually.
The bulwark against that impulse will be Buffett’s successor as chief executive officer, whose identity is one of the business world’s best-kept secrets. In all his years of giving interviews and taking questions at the company’s marathon annual meeting, Buffett has acknowledged that the board has picked his replacement, but he’s never disclosed the name.
In a cheeky dig at Buffet’s ego, the Businessweek article suggests that by naming his successor, it might take the spotlight away from the man himself, “who loves the attention”. While we think there’s some truth to that, we also agree that Berkshire’s board is keen to give itself room to maneuver. Prior to his resignation from Berkshire, it was widely accepted that David Sokol, known as his “Mr Fix-It and major influence on acquisition targets, would succeed Buffett.
Arguing that “These days, however, most arrows are pointing toward one man”, Bloomberg begins making its case by re-capping what Buffett has said about the qualifications for his job.
Buffett, at least, has talked about the qualifications for the position. In a 2015 letter to shareholders, he said the board wants his successor to be drawn from the company’s ranks and “relatively young, so he or she can have a long run in the job.” He suggested future Berkshire CEOs should hold the post for more than a decade and that they should be “rational, calm, and decisive.” And, he noted, they should have upstanding character, be unmotivated by ego or a big paycheck, and be “all-in” at Berkshire.
As the article points out, Buffett neglected to mention stockpicking skills, although the next CEO will be able to call on the two former hedge fund managers hired by Buffett, Todd Combs and Ted Weschler. The two manage about $20 billion of Berkshire’s stock portfolio, but are unlikely to have the skills or the desire to oversee Berkshire string of operating businesses. The role of Chairman is expected to be given to eldest son, Howard Buffet who’s job will be to “guard the company’s culture—and force out any future CEO who messes with it”.
Bloomberg thinks that a major clue to the identity was dropped by Buffett’s partner, Charlie Munger.
Munger called two executives—Ajit Jain and Greg Abel—examples of the company’s “world-leading” managers who are in some ways better than their boss. While Buffett later denied that any executives were in a “horse race” to succeed him, the logical inference from Munger’s letter was that the board had already settled on one of these two—and probably wasn’t as seriously considering other internal candidates such as BNSF Executive Chairman Matt Rose or Tony Nicely, the CEO of Geico. Abel declined to comment, and Jain and Buffett didn’t respond to requests for comment.
Jain and Abel each fit many aspects of Buffett’s carefully tailored job description. They’re deeply committed to Berkshire’s culture, which prizes efficiency and long-term thinking. Neither has outward character flaws that would immediately be disqualifying. And each has built large businesses for Buffett.
Jain runs the insurance business, which remains the core of Berkshire, while Abel runs the energy/utility businesses. It’s tough to make a judgement between the two, but Bloomberg thinks that, in the end, Abel’s youth will sway it.
Jain runs the company’s namesake reinsurance operation, which for decades has provided Berkshire with billions of premium dollars for investments and acquisitions. Buffett has repeatedly said that Jain has probably made more money for shareholders than he has. In 2011 he said the board would make Jain CEO if he wanted the job.
Abel has steadily expanded a utility holding company in Iowa into a colossus in the energy industry. It runs several power companies throughout North America and the U.K., interstate natural gas pipelines, and giant wind and solar farms. It’s a big part of Berkshire that stands to get only bigger, Buffett said in May, adding that it’s “hard to imagine a better-run operation.”
A key distinction between the two executives is age: Jain is 66, Abel is 55. Buffett is proof that the CEO can do well by shareholders long past typical retirement age. Even so, Jain has been facing some health challenges that could eventually make working more difficult, according to people who’ve recently spent time with him. Analysts and some longtime investors don’t think he wants the job. He’s also spent his career in insurance, a business less essential to Berkshire than it once was.
Bloomberg notes that others are increasingly sharing the same view about Greg Abel, including Berkshire investors and analysts. If Abel is the man for the job, he will have to contend with Berkshire’s need to allocate around $400 billion of capital over the next decade, a larger sum than Buffett deployed during the last half century. The article argues that Abel is far from a bad allocator.
That’s a skill Abel has spent years honing. An accountant by training, he joined the business he now runs in 1992 when it was a small geothermal power producer in California. Its head at the time was Sokol, who spotted talent in the young executive and promoted him to bigger roles. In 2000, as investors chased the latest dot-com stocks, Berkshire bought a majority stake in the business.
Being part of Buffett’s empire created an opportunity. Abel’s company, then called MidAmerican Energy Holdings, was able to retain its earnings, a rarity in the utility industry, where the norm is to pay generous dividends..For a time, he ran a utility in the U.K. People who’ve worked for him say he’s steeped in the details of his operations. He often visits his far-flung utilities in person. “He’s made big bets,” says Jeff Matthews, an investor who’s written three books about Berkshire. “He’s as smart as they come.”
Ironically, if Abel is promoted to fill Buffet’s considerable boots, one scenario which would make his job considerably easier would be a market crash. Finding value would be much easier in deploying the company’s $100 billion cash mountain.
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Author: Tyler Durden