Berkshire's proposed stock split to purchase Burlington Northern could usher in a new era for the conglomerate—maybe even membership in the S&P 500
On Jan. 20, Berkshire Hathaway (BRKA) shareholders are expected to open up the company's stock to a far less exclusive crowd of investors, a group who Chairman and Chief Executive Warren Buffett has long warned against.
By splitting Berkshire's class B shares 50-for-1, the price of the conglomerate's cheapest class of stock would fall from about $3,247 each to about $65. Class A shares—never split since Buffett began building Berkshire Hathaway 40 years ago—will still trade at about $97,500.
Buffett proposed the split despite his long-expressed view that, as he wrote in a shareholder letter in 1984, a lower share price would attract "inferior" buyers who don't share his value philosophy. If shareholders approve the split at a special meeting on Jan. 20—which they are widely expected to do—the stock could attract a broader array of new shareholders, including short-term traders. The split could also make Berkshire eligible for membership in the S&P 500-stock index, which would force index funds to pump billions of dollars into the stock.
A More Plebeian Class
Berkshire needs low-priced shares for its $44 billion acquisition of railroad Burlington Northern (BNI), whose shares are priced at a more typical $100. By lowering Berkshire's share price, even the railroad's smaller shareholders can receive a comparable amount of Berkshire stock as payment.
The stock split "is a real game changer," says Buffett watcher Robert Miles, author of the book The Warren Buffett CEO. It's as if Berkshire stock, once considered the "fine china" of the stock market, is now being made available to the "paper plate" crowd, Miles says. "Anyone who wants to eat at the table of Berkshire Hathaway can now do it."
Buffett, a billionaire and arguably the world's most famous investor, has many admirers who can't buy a batch of $3,250 shares but would find a block of $65 shares more affordable, says John Dorfman, chairman of Thunderstorm Capital and a Bloomberg columnist.
Even at a cheaper price, "people attracted to the stock will still mostly be admirers of Buffett's philosophy," Dorfman says. Don't expect a change in the company's "family feel," heightened every year by its annual meeting, a "Woodstock for capitalists," Dorfman says.
"It's a cult stock," says Stifel Nicolaus (SF) analyst Meyer Shields. Many follow the example of Buffett, the epitome of the buy-and-hold investor, by buying Berkshire shares and holding onto them for decades.
The Dreaded Traders
If Buffett admirers were the only ones expected to buy a cheaper Berkshire stock, he might have split its price a long time ago. But the stock split will make Berkshire shares more accessible to traders, many of whom don't hold onto shares for longer than a second.
Currently, Berkshire barely trades at all—at least compared with the equities of other large companies. For example, Berkshire has a market value of $151.2 billion, more than Coca-Cola's (KO) market capitalization of $130.4 billion. But, based on the past 12 months, the average daily trading volume in Coca-Cola (a Berkshire holding) is 11.1 million. The combined average daily volume in Berkshire's A and B shares is 37,431.
A stock split "will stimulate demand for B shares," possibly boosting the stock price, says Matt Carletti, an analyst at Macquarie Capital. It will also push trading volume toward levels more typical of large public companies, he says.
What's largely missing from Berkshire's shareholder base is traders, especially the high-frequency traders who use computers to jump quickly in and out of a stock, often in a matter of milliseconds. Because such traders make tiny profits on each trade—often less than a penny at a time—they avoid high-priced stocks that require large upfront investments, says Larry Tabb, founder and chief executive of the TABB Group, which advises firms on trading trends. One advantage of frequent trading is it can actually reduce the volatility of shares from moment to moment, Tabb argues. "If [fewer] people are trading, one big order can move the stock."
A Shot at Joining the S&P 500
But Buffett has made clear how he feels about short-term traders. He warned of the "frictional costs of trading" in his 1993 annual letter to shareholders. Unlike traders and other short-term investors, he wrote, "Our shareholders think and behave like rational long-term owners and view the business much as [Berkshire Vice-Chairman Charles Munger] and I do." Berkshire did not respond to a request for comment.
Currently, Berkshire Hathaway is the largest corporation not included in the S&P 500. The high price and low liquidity of its shares have made it ineligible.
A spot in the S&P 500 will be opening up this year when Burlington Northern exits the index after its acquisition, but the index's administrator, Standard & Poor's, won't tip its hand. S&P's senior index analyst, Howard Silverblatt, says the S&P 500 is carefully constructed to "emulate" the performance of the broader market. (Silverblatt is a blogger for BusinessWeek.com's Investing Insights.) S&P's eligibility rules give its index committee some discretion on which stocks to include, beyond some key criteria that include "financial viability" and "adequate liquidity and reasonable price."
Because so many investor dollars are held in index funds that track the S&P 500, Silverblatt estimates those funds as a group need to buy up 11% of a companies' shares when it is included in the index. (In Berkshire's case, that would represent $16.6 billion in A and B shares.) And that doesn't include the impact of buying by other investors who unofficially track the S&P 500, or by traders trying to piggyback on the market trend, Silverblatt says.
Buffett's Credibility
Unlike almost all other large public companies, Berkshire doesn't hold quarterly conference calls with analysts. Executives don't feel the need to travel the country currying favor with top stockholders, and Berkshire lacks an investor relations department or even a comprehensive Web site providing investor information.
According to Gerard Carney, co-chairman of Fleishman-Hillard's financial communications practice, Berkshire can ignore so-called best practices in investor relations largely because of Buffett. "He's got such credibility," Carney says, and as a result, "they're probably the only organization in the world that can do that."
A more widely held stock may increase the number of shareholder calls to Berkshire headquarters in Omaha, Carney says, but few expect Buffett or other executives to run the company differently.
"It may change the trading behavior," Shields says of the stock split. "It doesn't change the behavior of management."
It's hard to see a raft of new and different shareholders changing the views of Buffett, who turns 80 on Aug. 30. The stock split could end some of Berkshire Hathaway's idiosyncrasies, causing its stock to trade much more like other blue-chip companies. But a far bigger change in Berkshire's character and culture looms in the coming years, when its leader and largest shareholder is no longer at the helm.
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