Warren Buffett on M&As – of benefit only to investment bankers, not shareholders

With his Berkshire housing more than 80 wholly owned subsidiaries, chairman Warren Buffett is often asked why he doesn't spin them off into separate listings. Buffett reckons the only beneficiaries of such steps are investment bankers.

Published on:

10 Jun 2015, 7:42 am

Hi there,

With his Berkshire housing more than 80 wholly owned subsidiaries – nine of which are big enough to be Fortune 500 companies – chairman Warren Buffett is often asked why he doesn't spin them off into separate listings. Like BHP Billiton has just done with South32; Mondi with Mpact and Naspers with Novus. The only beneficiaries of such steps, Buffett reckons, are investment bankers.

A typical cycle runs like this. Playing on ego and latent power-mania, bankers convince the CEO of a public company to buy businesses, paying between 20% and 50% more than their intrinsic value as a "control premium". As 80% of these deals actually fail, a few years later the same bankers just as earnestly urge spinning off the earlier acquisition to "unlock shareholder value". With no control value accruing to the original buyer of course. But plenty of fees to fund some expensive tastes.

The warning is clear: beware of companies whose CEOs like to buy and sell businesses. Buffett says Berkshire will never sell one of its subsidiaries. His closest local equivalent, Brian Joffe of Bidvest, has bought plenty but never sold a business. Ditto Aspen's Stephen Saad. Remember that fact when merger and acquisition mania next hits the JSE.

Best

Alec

From Biznews community members.

Actually Alec, Berkshire Hathaway now finds itself in almost exactly the same position that the Rockefeller Trust found itself in, when forced to unbundle in 1911 by the US Congress because of its monopoly position in the oil industry. And almost all of the 10 unbundled entities of 105 years ago are still flourishing – Exxon Mobil, Chevron, Conoco Phillips, and so on. All bets are on that exactly the same thing will happen voluntarily to BH when Mr Buffett & Mr Munger, who jointly control 35% of the shareholder votes, are no longer there. Depending on market conditions at the time when this unbundling into 10 or more S+P 500 components occurs, this could well be the greatest wealth creating operation(for fortunate BH shareholders) of the last 100 years.

Kind regards

David Mordant.

Morning Alec

Trust you are well ?

Loved the commend on M & A

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