What Buffett does not tell to Berkshire's shareholders
By Alexander Chepakovich, CFA 2011-09-27Yesterday Warren Buffett announced a plan to repurchase stock of his own company - Berkshire Hathaway Inc. This was highly publicized, as all deals done by the famous investor. It appears that significant portion of the profit Buffett's deals generate come from such publicity and his celebrity status. Shares of the company surged more than 8% on the announcement – this is without even a single dollar spent on the stock repurchase.
The share repurchase announcement seems like a great news to Berkshire's shareholders, of which Warren himself is one of the largest. No doubt that Mr. Buffett has best interest of the company's shareholders in mind, but the picture does not seem to look right because of the scarcity of detail (even an approximate amount to be spent on the share repurchase has not been mentioned) and overpublicity
Just out of curiosity I looked at the consolidated statements of changes in shareholders' equity in Berkshire Hathaway's latest annual report and was astonished by how little is disclosed there. For example, what would you make out of an entry like this: "Issuance of common stock and other transactions"? What are these "other transactions"? Nowhere in the annual report will you find an explanation of this.
Now, let's take a look at the numbers. In 2010 Berkshire acquired Burlington Santa Fe Corporation for the aggregate consideration of $26.5 billion that consisted of cash of approximately $15.9 billion with the remainder in Bershire common stock (this is from Note 2 to consolidated financial statements). This gives us the value of the stock for this transaction to be $10.6 billion. The remarkable "Issuance of common stock and other transactions" entry mentioned above, on the other hand, shows that about $11.1 billion worth of stock was issued in 2010. The difference is $0.5 billion.
Where did this halve a billion of dollars go to? Note 18 (Common stock) of the Notes to Consolidated Financial Statements does not give even a hint of an answer to this question. On the contrary, additional questions arise when you read it. The "other" category we've encountered in the consolidated statements of shareholders equity appears here bundled up with "Conversions of Class A common stock to Class B common stock" – I am not even sure that this is even the same "other".
OK. Let's see if we can figure out this "other" using simple arithmetic. Last year 188,752 Class A shares were converted into 285,312,547 Class B shares. However, using the ratio of 1,500 Class B shares for every Class A share gives us only 283,128,000 Class B shares. The difference of 2,184,547 Class B shares, apparently, accounts for the "other" category. At this, it is not certain at all that all Class A shares were converted into Class B shares. You will not find anywhere in the annual report an explanation of what actually has happened to the shares.
The murky accounting/disclosure practices related to the shareholders' equity put a big question mark over the wide-spread belief that Warren Buffett has best interest of the company's shareholders in mind. By the way, it is surprising that Berkshire's auditor (Deloitte & Touche LLP) and the regulators allow the company to get away with this.
Being the top manager of Berkshire Hathaway provides Mr. Buffett with opportunities not available to other shareholders. I am not implying that there is something inappropriate going on here. All I am saying is that there is just not enough data to see how the equity capital is used in the company. I suspect, though, that even after the "Buffett rule" new tax levies are imposed on U.S. affluent taxpayers, Mr. Buffett will still continue to pay far less in taxes in percentage terns then his secretaries.