Warren Buffett retired as Berkshire Hathaway (NYSE:BRK.B) CEO at the start of the year. But he’s still around as Chairman of the Board of Directors – for now, at least.
Investors though, need to think about the question of what will happen to the company on the sad day Buffett is gone from it entirely. And there’s an important risk to consider.
Buffett’s shares
The issue for Berkshire shareholders has two parts to it. One is that Buffett has been an extremely good leader for the company and will be an extremely tough act to follow.
On this front, I think there’s reason to be optimistic about Greg Abel. The new CEO has wasted no time in getting to work by making a move to sell off the firm’s stake in Kraft Heinz.
More generally, Abel has a reputation for being much more involved with Berkshire’s subsidiaries than Buffett was. And this might be what the company benefits from most going forward.
Berkshire’s size means acquisition opportunities that can make a difference to its profits are hard to come by. So a CEO focused on improving the existing operations could be what’s needed.
Buffett’s shares
The other issue for Berkshire shareholders is what happens to Buffett’s shares in the company. These are set to be distributed to various philanthropic organisations, but what comes next?
Those organisations are likely to sell the stock, either because they want to or because they have to. And this raises the possibility that they might fall into the hands of activist investors.
New shareholders could push for changes that might cause the share price to jump in the short term, but aren’t in the firm’s long-term interests. And that’s the risk.
Buffett owns around 15% of Berkshire’s economic interest, but the nature of the Class A shares makes this over 30% of the voting power. So someone buying these could have a very big say.
Berkshire’s defences
Buffett’s stake is worth around $150bn, so it would take a lot for any individual or organisation to buy the shares. But it isn’t entirely out of the question and it’s a risk I’ve been thinking about.
Over the last few years, Berkshire Hathaway has – very conspicuously – grown its cash reserves to $382bn. That’s more than enough to buy Buffett’s shares when the time comes.
In other words, Berkshire might stop a potential activist by buying Buffett’s stake before anyone else can. And the company has done something similar before, back in 2012.
This would also benefit investors by reducing the number of shares outstanding. While the firm needs cash to cover potential insurance liabilities, $200bn should be more than enough for this.
Berkshire without Buffett
Investors have been wondering why Berkshire Hathaway has been accumulating huge capital reserves. Buffett has said for some time that it isn’t because he’s expecting a stock market crash.
One potential reason, though, is that it puts the company in a strong position to deal with what happens when Buffett’s shares are sold. And this isn’t just about fending off a potential risk.
Buying back around 15% of the firm’s equity should benefit existing shareholders in a major way. That’s why I hold the stock and why I’m still a buyer at today’s prices.
