Inelegant Investor

It’s July 23, 2000. The Bubble has burst, though bottoms haven’t been reached. The World Trade Center still stands tall. Enron is one of the world’s most respected companies. The New York Times declares Hank Greenberg a better investor than Warren Buffett.

As the article points out, over the previous 5 and 10 year periods, AIG had substantially outperformed Berkshire. The article goes on at great length to paint Greenberg and Buffett as “Polar Opposites”, Buffett, “invests like a riverboat gambler,” while Greenberg “may act like the tough guy, but when it comes to investing A.I.G.’s capital, he turns cautious.”

ONE plays the part of the hayseed, the other the quintessential New York tough guy, complete with flinty stare and a vocabulary that might stun the crowd at a hip-hop concert. One loves bridge and jokes that he reluctantly drags himself around a golf course; the other is a bundle of energy whose idea of relaxation is rocketing down a frozen ski trail.

The events of the subsequent decade make the article seem laughable. Greenberg was forced out of AIG by NY Attorney General Spitzer, and AIG required nearly $200 Billion in government capital to avert the most spectacular corporate collapse in American history. Were AIG’s flaws already present? Could a careful investor have detected red flags back then?

One more hypothetical nags at us: what would the world look like today had Greenberg managed to hold onto his job as AIG CEO and if Buffett had lost his in the midst of a 1970s SEC investigation. It would be a different world indeed.

For years, Warren Buffett has spoken of searching for an elephant of a transaction. Berkshire Hathaway’s(BRKA,BRKB) announcement today that it will be acquiring Burlington Northern Santa Fe(BNI) in a $44 Billion deal represents the final capture of an elephant that has been in Buffet’s sights for several years as Berkshire has consistently bought to acquire almost 22.6% of the company prior to today.

The deal will consist of 40% stock and 60% cash. That Buffett is paying with Berkshire stock says something interesting about his appraisial of Berkshire’s future prospects. Buffett has in the past lamented stock deals he’s done(in particular the General Re deal). Buffett stated that stock is included in this deal in order to provide tax free treatment for BNI shareholders. Using stock implies that Buffett believes that BNI will grow intrinsic value at a faster rate then the rest of Berkshire.

Also of note is that Berkshire will be splitting Class B shares 50-1 in order to be able to compensate even the smallest BNI shareholder in stock. Buffett has been notoriously resistant to splitting his stock. It will be interesting to see what impact this has on Berkshire. We believe it represents a significant step in Berkshire’s transition from an investment partnership run by Buffett to a global corporation that will thrive in a post-Buffett era. It is also likely that the split will pave the way for Berkshire’s addition to the S&P 500.

Disclosure: We own shares of Berkshire Hathaway