Tuesday, February 02, 2010
What I Learned Writing a Book, Part II: The Oracle Appears, Alone…Sort Of
There is some gamesmanship going on as we enter the cozy, wood-floored Peter Kiewit concert hall here in downtown Omaha.
Of course, it’s nothing like what goes on at the Berkshire Hathaway annual meeting. At that “Woodstock for Capitalists,” as Buffett likes to call it—held not in a 2,000-seat concert hall but in a 17,000-seat arena within the Qwest Center a few blocks away—draws so many shareholders from around the world that lines begin to form, for hundreds of yards around the glass and steel complex, before the sun rises, just waiting for the doors to open.
If the annual meeting is the equivalent of a musical Woodstock, without the drugs and naked dancers, then today’s special meeting is more like one of Sting’s lute concerts. (If you never went to one of Sting’s lute concerts, you are not alone: only hardcore Sting fans went to those, and only hardcore Buffett fans are here.)
This will be, indeed, a very mellow affair.
There no camera crews from China prowling the halls for interviewees, no giant video screens hanging alongside the stage, and no young men in Dockers and button-down oxford shirts bursting inside as soon as the doors open, running down the aisles and claiming seats near the stage.
Instead, there are older couples—retirees with time to spare on a sleety, cold, blustery Wednesday morning—and professional investors (all men, most in suits and ties), all walking casually down the aisles, chatting, spotting friends, and selecting seats.
And this is where the gamesmanship comes in.
For even in this cozy concert hall, and even among these—the most serious observers of Warren Buffett and Berkshire Hathaway—there are people are looking for the best seat possible from which to watch Warren Buffett.
Several new acquaintances and I take seats in what appears to be a prime spot, a few rows from the front. The money manager seated next to me is a 20 year Berkshire veteran who had introduced himself out in the lobby—he had read “Pilgrimage to Warren Buffett’s Omaha”—and I learn he attended the last and only other special meeting in Berkshire Hathaway’s post-Buffett history: the meeting to approve the acquisition of General Re.
We talk about that meeting—made legendary when Buffett put up a life-size cut-out photograph of Charlie Munger in the seat next to his and played tape-recorded bits of Mungerisms at appropriate times—and he observes that there were far more investors at that meeting than this one.
Indeed, by my count, there are only about 150 people are here today. By contrast, there were 500 shareholders at the 1998 special meeting.
What accounts for this loss of interest—aside from the bad weather—is one subtle but distinct difference between the General Re meeting eleven years ago and this one today.
Today’s meeting is merely to approve a stock split that will enable Berkshire’s purchase of Burlington Northern railroad. Buffett’s going to buy Burlington come hell or high water, or, as Buffett once said in reference to another transaction, “even if Ben Bernanke runs off with Paris Hilton.”
The 1998 special meeting, on the other hand, was held for Berkshire shareholders to approve the company’s merger with General Re.
Now, until Burlington Northern came along a few months ago, General Re had been the biggest acquisition in Berkshire’s—and Buffett’s—history, although despite Buffett’s high hopes and effusive cheerleading at the time, it did not prove to be one of the best.
Buffett paid $22 billion for General Re, all of it in shares of Berkshire stock (hence the need for a special meeting to get shareholder approval), meaning the cost of the deal went up along with Berkshire’s stock price, even if General Re’s business did not likewise increase in value.
And for some time afterwards, that prospect did not look good. Indeed, the 1998 press release in which Buffett announced the deal reads embarrassingly wide-eyed, given what was to follow:
“But the main attraction of the merger [with General Re] is synergy, a word that heretofore has never been used in listing the reasons for a Berkshire acquisition. In this transaction, however, there are at least four areas of powerful synergy, which Charles Munger, Berkshire’s Vice Chairman, and I believe justify the premium price that Berkshire is paying…”
Not only did the synergies take longer to appear, but one of them—“removes constraints on earnings volatility”—would come to haunt Berkshire after the 9/11 terrorist attacks on the World Trade Center caused more than $2 billion worth of unanticipated “earnings volatility.”
In addition, and to Buffett’s eternal annoyance, Berkshire would later spend $400 million laboriously unwinding 23,000 derivatives contracts fermenting with General Re at the time of the acquisition.
(On the plus side, the experience of unwinding those contracts during the salad days of the early 2000s would directly lead to Buffett’s stern warnings against derivatives as a market cure-all in his 2002 shareholder letter, and help Berkshire emerge from the 2008 crisis in far better shape than its peers.)
Furthermore, Gen Re would, under Buffett’s watch, become embroiled in a scandal that would eventually entail testimony from Buffett himself; threaten the squeaky-clean image Buffett demands the Berkshire business family to maintain; and result in the conviction of several former Gen Re executives—all for entering into “sham transactions” by which Gen Re helped AIG dress up its reserves to satisfy Wall Street’s Finest.
In fact, I’ve been told—while preparing for an early-morning interview with Bloomberg TV—that a final settlement on that sordid chapter was coming, with Gen Re paying $92 million to both settle investor claims and put an end to Federal investigations into the matter.
Thus, as Berkshire closes out the final, downbeat chapter to that last previous record-setting acquisition, we Berkshire shareholders are being asked not to approve the acquisition of Burlington Northern railroad, but merely to allow a 50-for-1 stock split and the elimination of paper stock certificates for the Berkshire “B” shares.
The Berkshire “B” shares—and I’ll keep it light so our readers’ eyes don’t roll back into their heads—are simply cheaper versions of the regular Berkshire “A” shares. The “A” shares trade around $100,000 a share—yes, $100,000 per share—and most people can’t afford to buy them. So Buffett created the “B” shares at 1/30th the value of the “A” shares.
One more difference, and it’s huge: the “B” shares have fewer voting rights than the “A” shares—like 1/200th of the voting rights. This might seem to be a glaring incongruity at a company whose CEO is highly vocal about the rights of shareholders, and also highly outspoken about the irresponsibility of “lapdog” Boards of Directors, but readers of “Pilgrimage to Warren Buffett’s Omaha” know this is only one of several incongruities when it comes to the greatest investor in the world.
Before today’s meeting, the vote-deprived “B” shares sell for around $3,500 each. After the meeting, assuming we’ve approved a 50-for-1 split, they’ll sell for $70-something a piece…and they’ll be even more vote-deprived.
Instead of having 1/200th of the voting rights of an “A” share, they’ll have 1/10,000th of an “A” share vote.
We are seated, as I said, a few rows back from the stage. Our seats are, technically, “Stage Left”—i.e. to the left of center stage when facing the audience—and this is where the gamesmanship comes in.
“The speech is on the other side,” somebody says, pointing to the table onstage where Buffett will sit. It has two microphones, just like the annual meeting, and a stack of papers has been placed at the seat which is to our left as we look at the table, but which is, technically, Stage Right.
Someone else observes, “Well that’s where he always sits at the annual meeting.”
So we get up and walk through an empty row to the other side of the concert hall, and pick seats a few rows back that will presumably give us a better look at Buffett when he sits down at the microphone with the speech in front of it.
Others notice and follow our example; others notice but sit pat. After all, almost any seat in the room will provide a good view of the “Oracle of Omaha.”
I am introduced to a farmer from Iowa. He is a longtime Berkshire shareholder, and we begin talking about the harvest and the outlook for corn prices. Business has been good, he tells us, what with demand from ethanol plants and the wet November that interrupted the harvest. “I was out there yesterday and there’s a lot of corn to be harvested.”
“Isn’t this kind of late in the season?” we ask.
“It is,” he says, “it is, but—”
Our focus turns to the stage, where a woman has crossed from the wings and is arranging things on the table. She moves the speech from one microphone to the other, raising speculation of a shift in Buffett’s preferred seat.
“Maybe Charlie’s coming,” somebody says hopefully.
This bit of Kremlinology ends when Buffett himself strides in from Stage Left, smiling as the crowd begins to applaud.
He sits down on our side of the table, Stage Right—“where he always sits”—and fiddles with the microphone. There is no bowl of See’s candy, as at the annual meeting, but there are two cans of Cherry Coke within arm’s reach.
“This is a little embarrassing,” Buffett begins, in his husky, folksy voice. “When Charlie’s here we usually get about 35,000 people.”
While we’re laughing, Buffett lifts up a life-size cut-out of a youthful Charlie Munger—the same one it would appear he used at the special meeting in 1998—and places it in the other seat.
He presses a button and Charlie’s familiar, higher-pitched voice says, “I have nothing more to add.”
“It’s as good as having him here and we don’t pay him,” Buffett says.
After dispensing with the preliminaries, Buffett announces he will accept questions on the motions before us.
And there are questions.
—to be continued.
I Am Not Making This Up
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The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 9:10 AM