Monday, March 05, 2012

Bill Gates To Succeed Warren Buffett? Not A Chance…

 When it isn’t obsessing about the meaning of a meaningless number (“Dow 13,000”), the financial world loves to speculate about the name of the man Warren Buffett has identified as his successor at Berkshire Hathaway.

Editor’s Note To Politically-Correct Readers: Buffett’s successor will be a male, so there is no point writing “person,” or “man/woman,” or “non-gender-specific life-form,” rather than simply “man.”  Buffett employs female CEOs atop only four of the 80 or so companies in the Berkshire fold, none with the experience to step in as CEO of a company with more than a quarter-million employees and operations ranging from, as Buffett puts it, “lollypops to jet airplanes.” And while Warren Buffett may seem like the most liberated, open-minded uncle you ever knew, he is, at heart, strictly mercenary when it comes to business.  As for female “liberation,” Buffett has more of a ‘50s era Hugh Heffner sensibility than his female admirers might want to think: he once sent a holiday card with a photo of the Berkshire Board of Directors (including its female members) standing outside a Hooters, surrounded by the Hooters, er, staff—the jocular message inside the card being that the setting explains the high attendance at Board meetings.  And if you don’t believe me, you haven’t read “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks On Investing, 2012).”

 Getting back to the story here, Warren Buffett last Saturday announced in his shareholder letter that he had identified a successor as his CEO, along with “two superb back-ups.”
 While it was not new-news that Buffett had a successor, it was news that the individual has the Board’s seal of approval—a more formal-sounding arrangement than in years past when, for example, Buffett joked that there was simply a name in an envelope, along with instructions of how to proceed upon is death…the first being, “Take my pulse again.”
 Speculation as to the identity of Buffett’s successor began immediately—almost matching that surrounding who fathered Snooki’s baby—with one Berkshire shareholder in the Wall Street Journal picking Microsoft Chairman Bill Gates as The Guy (Buffett’s successor, not the father of Snooki’s baby…)
 After all, Gates is a close friend of Buffett’s, a Berkshire Board member, has run a large and successful company and is well known to Berkshire’s Board.  But there’s a problem with this angle that we’ll get to in a minute.

 By way of background, Warren Buffett actually wears three hats at Berkshire, each of which will be filled by different men: those hats are Chairman of the Board, Chief Investment Officer, and CEO.
 The Chairman of the Board hat will go to Buffett’s oldest son, Howard, so that a Buffett family member can oversee the family’s major asset while also making sure what Warren Buffett so lovingly and painstakingly built is not trashed by some scummy corporate raider in years to come.

Editor’s Note To Non-Politically-Correct Readers: Yes, Buffett is being entirely, completely, 100% hypocritical in annointing his son—a member of what Buffett himself disparages as “the lucky sperm club” when it comes to describing other rich peoples’ children—as his heir as Board Chair, but you’ll have to get over it: Buffett is smart enough to be able to rationalize anything, including this deal.  And his shareholders are fine with it.

 The second hat—Chief Investment Officer—is also publicly defined: hedge fund managers Todd Combs and Ted Weschler, recently hired by Buffett, will handle Berkshire’s stock investments and, in Buffett’s words, “be helpful to the next CEO of Berkshire in making acquistions.”
 The third hat—and the one all the fuss is about—is who, exactly, that CEO of Berkshire will be upon Buffett’s death or incapacity.

Editor’s Note to Anyone Who Thinks Buffett Will “Retire”: Warren Buffett, now approaching 82 years of age, will not “retire,” despite pesistent media speculation set off by a Berkshire press release that used the term when announcing the hiring of Todd Combs.  Buffett will run Berkshire until he drops dead, has a stroke, or otherwise can’t get out of bed—and even if he can’t get out of bed, he’ll probably run it so long as his mind works: he loves the job; it requires, as he likes to say, “no heavy lifting”; and besides, Buffett has no hobbies outside of making money except for playing bridge.

 So who’s the CEO going to be?
 The answer involves a lot of Kremlinology, which is fine with Buffett since he doesn’t want the focus to shift from himself to his successor before the time comes because, a) he likes the limelight, and b) he doesn’t want anyone distracted by the media attention from doing what’s best for Berkshire.
 While Buffett has insisted that former Berkshire top guy David Sokol was never actually The Guy, Sokol did appear to succumb to what Charlie Munger called “hubris” for precisely the reason that he was Buffett’s presumed heir-apparent, with frequent CNBC coverage and the kind of attention that can only go to one’s head—in a bad way.
 What we know for sure about The Guy is what Buffett wrote in his letter:
“Berkshire’s directors are at the top of the list in the time and diligence they have devoted to succession planning.  What’s more, their efforts have paid off…. Your Board is equally enthusiastic [as they are about Combs and Weschler] about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire.”
 Reading between the lines—as opposed to jumping to conclusions, which is what much of the speculation involves—it seems clear that Bill Gates is not The Guy. 
 For one thing, Bill Gates is a member of the Berkshire Board (he’s in that unfortunate Hooters photo), and Buffett would probably not have written that description the way he did if a Berkshire board member was The Guy.
 For another thing, Gates is not a manager, and never has been.  He was a visionary who built one of the most valuable and world-changing companies in history, but he has never been known for or admired for his “managerial” qualities.  Finally, Gates happens to Co-Chair the Bill and Melinda Gates Foundation, which is the recipient of Buffett’s Berkshire holdings—making him, in effect, a fiduciary for Buffett’s heirs.  He can’t do both jobs at once.
 So who’s The Guy?
 Well, Barron’s—which a few years ago identified David Sokol in a cover story on the subject—now says it’s Ajit Jain, the reinsurance genius who has added more value to Berkshire Hathaway than anyone but Warren Buffett himself.   (Barron’s keys off Buffett’s statement that the Board has had “a great deal of exposure” to the guy.)
 And while it’s true Jain is familiar to everyone at Berkshire (he’s been making money for Buffett for 25 years) it ignores the fact that Jains runs the reinsurance business out of a small office in Stamford, Connecticut, without as much exposure to the Berkshire businesses that now drive the company’s growth (energy, railroads and manufacturing) as others.
 So while we’d bet Jain is one of the two back-ups, since he can step into Buffett’s shoes easily, if need be, the “managerial” aspect cited by Buffett suggests somebody running actual businesses, which leads to Tony Nicely, who has run GEICO brilliantly—and to big props from Buffett along the way—for decades, as well as Tad Montross of GenRe, Matt Rose of Burlington Northern, and Kevin Clayton of Clayton Homes—all of whom excel at what they do, and (except Nicely) are young enough to fit the bill…but may lack the broad experience of our pick: Greg Abel, the dealmaker and ace manager of Berkshire’s immensely important MidAmerican Energy unit.
 Well-liked, and presumably with plenty of exposure to the Berkshire Board since Buffett bought MidAmerican over ten years ago (back when MidAmerican’s executive offices were across the street from Berkshire’s in Omaha), Abel has the experience of operating regulated, multi-national businesses plus a healthy deal-making background that Berkshire will need over the long run.

 But whoever The Guy actually is (and the name may change before the time comes), Berkshire will be Berkshire after Buffett is off the stage thanks only to the fact that the company is no longer a collection of investments that will compound at staggering long term growth rates thanks to the genius of Warren Buffett’s investment capabilities, but a conglomerate made up of businesses that will rise and fall—but mostly rise, over the long term—with the overall economy.
 And in that sense, there is not, and never will be, a replacement.


Jeff Matthews
“Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011)

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and 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 by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

6 comments:

Jeff Matthews said...

Anonymous: thanks. Corrected.
JM

Anonymous said...

Actually, it's *not* hypocritical at all.
If he left his fortune to Howie, *that* could be called hypocritical.
If he designated Howie CEO, or CIO, despite an obvious lack of qualifications, *that* might also be called hypocritical, or at least kinda dumb.

Asking his son to be Chief Preserver of 'the Culture,' as Board Chairman, isn't hypocritical at all, and it's fairly easy to understand his motivations, though you may not agree with his decision.

I kind of like your thoughts about CEO succession, though, and I think your thoughts about Abel are pretty reasonable.

Anonymous said...

See Buffett's comments on CNBC two Mondays ago. He said categorically that it was not Sokol at any time, and that the current Guy has been the #1 Guy for several years now. So we're supposed to believe that Buffett picked the #2 man at Mid-American several years ago as his CEO successor at Berkshire?

Jeff Matthews said...

Yes, I caught the Buffett comments on CNBC. a) I don't buy that Sokol was never the guy, b) I don't see why Abel's rank excludes him, for the reasons expressed.

JM

TT said...

I don't understand your conclusion, Jeff. Berkshire was always a "collection of investments" advantageously purchased by Buffet to accrue returns greater than those of the market. The only reason why Berkshire remains Berkshire is because of Buffet. Unless I'm missing something and conglomerates are back in fashion a'la the late 1960's, it is difficult to believe that these businesses operating under the umbrella of Berkshire would mean a higher valuation for them or for Berkshire shares. The Berkshire brand is Buffet and without him, this special entity ceases to be.

Furthermore, the only "edge" that Berkshire offers to to sellers is the hands-off approach to management that Buffet pioneered. The only "edge" that Berkshire offers to shareholders is the Buffet/Munger special sauce: picking strong franchises with moats at fire sale prices. Sometimes, shareholders get particularly lucky in that Berkshire can get lower prices than other private equity or buy-out shops because it is Buffet doing the buying. I don't see that persisting in this day and age...and frankly the ability for Buffet to get great prices in a companies up for bid has been on the wane. Certainly with Buffet gone, the Berkshire discount disappears probably forever.

Indeed Jeff, I can only surmise that the succession to Buffet/Munger will be messy and confusing and bad for shareholders. Buffet's secrecy about this is foolish and out of step with his own tenets of good investment. Above all, shareholders require transparency about leadership since so much of Berkshire's value is wrapped up in the personality of one man. Splitting the leadership in a trice (actually in quarters) will ultimately lead to fights and fall outs. None of these successors: CEO and the two investment officers will be happy "working" for the other until (like Highlander) there can only be ONE.

I can only conclude that Berkshire remaining Berkshire after Buffet dies is nothing but wishful thinking. If I were a shareholder, I would be advocating for a clean break from the Berkshire investment style of the past. If you aren't going to clone Buffet or keep him alive in a vat so he can make investments in perpetuity, you may as well pursue a break-up strategy or a game-plan that emphasizes Berkshire's size advantages. In any case, nobody will believe you can persist in outsized investment returns with three different people running the company...none of whom having Buffet's folksy persona, ruthless instincts, or luck.

Jeff Matthews said...

TT, I think you need to re-read the "conclusion" you disagree with. It's not far off your own.

JM