Buffett runs the meeting briskly and efficiently—so much so that within minutes of his first appearance on stage we reach the guts of the thing: he offers a motion to approve the 50-for-1 stock split and elimination of paper certificates for the Berkshire “B” shares.
Now, for shareholders accustomed to the spectacle of the annual meeting, when 17,000 shareholders pack into the Qwest Center arena for the sole purpose of watching Buffett and his vice-chairman, Charlie Munger, take questions, it is an odd thing to sit in a Berkshire Hathaway meeting and hear Warren Buffett ask for a second to a motion.
And it is odder still to have shareholders respond “Second!” from the floor.
The annual meeting, or “Woodstock for Capitalists,” as Buffett likes to call it, is, after all, a highly moveable affair. Shareholders come and go as they see fit during the five-plus hours of Buffett and Munger’s question and answer session: they grab a cup of coffee to help stay alert; or they go shopping among the Berkshire booths at the nearby exhibition hall; or they skip out to take advantage of the shareholder discount at the Nebraska Furniture Mart. After all, their presence is not required.
But nobody’s moving from this meeting. This is real business.
Buffett moves quickly. The motion has been seconded, and we may now discuss it, he says. Shielding his eyes from the spotlights trained on his seat, he points out two microphones set up for the purpose—one in each aisle—and warns us that the discussion is strictly about the motion to split the stock.
This is disappointing.
Nearly everyone in this room braved the chancy odds of making Chicago airplane connections, not to mention the cold, sleety weather and slippery sidewalks outside to ask Warren Buffett some good, old-fashioned questions. There will be none of the “What should I do with my life?” type of back-and-forth that permeates the annual meeting from this crew.
I sense from those around me that every one of the individuals in this room has at least one question they’d like to ask, given the chance. My seatmates glance at one other after the no-straying-off-topic admonishment.
“Well he can’t not answer a question,” somebody says hopefully.
But it does not look good: there is one lone shareholder standing at the microphone placed in the aisle near us. This is a far cry from the dozens of hopefuls that line up at each of the thirteen microphones placed in the Qwest Center for the Buffett and Munger Q&A session at the annual meeting.
Buffett—who has trouble seeing through the glare of spotlights which microphone the question is coming from: the one in the aisle to his left, or the one in the aisle to his right—is told there is a question, and he calls on the one brave shareholder
The shareholder is from Princeton, New Jersey (the same protocol as that which governs the annual meeting is in place here: shareholders state their name and where they’re from before asking their question), and he begins by pointing out that the proposed stock split will occur whether or not the Burlington Northern acquisition goes through.
So, he asks, “what is the benefit to vote for the split even if the deal doesn’t go through?”
It’s a good, reasonable question, and Buffett drops all pretence of keeping things brief by starting a classicly Buffettian answer—long and rambling, but to the point.
“Burlington has 250,000 shareholders,” Buffett says, warming-up to the topic. Paying part of the price with Berkshire stock “enables Burlington shareholders to get a more tax-efficient transaction.”
This is true: shares sold for cash in a takeover trigger capital gains tax, but shares swapped for stock trigger no taxable event. Thus, most individual investors—and individuals monitor their after-tax returns far more carefully than mutual fund managers—prefer stock swaps to all-cash tenders. Buffett wants to accommodate those Burlington shareholders looking to avoid a tax hit.
Now, it is precisely this kind of matter-of-fact maneuvering around the U.S. tax code that drives a healthy slice of investors crazy when it comes to Warren Buffett.
Buffett is a master of such maneuvers, going back to his early days running a hedge fund (yes, Warren Buffett ran what amounted to a hedge fund: see the chapter titled “Beyond Buffett” in “Pilgrimage to Warren Buffett’s Omaha”.) And for years he benefitted mightily from same the tax-advantaged carried interest provisions of private partnerships which he now criticizes.
(His type-written letters to his limited partners from those years, which are available on the internet, are worth every bit as much to read as his annual Berkshire “Chairman’s Letter.”)
And if there is one thing I have learned writing a book about Warren Buffett and his company—or, more precisely, while giving speeches about the book itself—it is that in almost every crowd there is at least one investor who actually despises Warren Buffett.
I’ve learned to spot them quickly.
They tend to sit in an uptight position, with arms and legs crossed, making a tight face. When question time comes around they inevitably raise their hand aggressively and ask in a louder-than-normal voice how it is that Warren Buffett gets off blabbing about taxes when he, Warren Buffett, ran a hedge fund for years; or when he, Warren Buffett is avoiding the inheritance tax by giving away his stock to his billionaire friend, Bill Gates; or when he, Warren Buffett, could just pay higher taxes if he wanted to….
Buffett himself has been asked these questions over the years, of course: he merely responds, quite rationally but, to his critics, quite lamely, that the laws are the laws, and he obeys those laws.
Thus it is that if the Burlington Northern Board of Directors wants part of the purchase consideration from Berkshire to be stock, both in order to avoid capital gains taxes on a good portion of their shareholders’ profits and to benefit from future growth in Berkshire Hathaway (although Buffett does not mention the second part of that rationale here today), well, Buffett is going to accommodate them.
The stock split is necessary, he explains, because Burlington Northern shareholders would need to own more than $3,000 worth of Burlington stock to convert to Berkshire, since the current price of Berkshire “B” shares is over $3,000.
And if he must split his own company’s high-priced stock so that small investors in Burlington may get the same tax advantages as large investors who will choose to sell out for stock rather than cash, then Buffett is perfectly willing to do it:
“We want to earn the reputation of treating every shareholder equally and with respect,” he says. “To not offer people with less than $3,000 of Burlington Northern the same as those with more, we felt it was the wrong way to go…”
As for his own well-known, and long-voiced, opposition to splitting Berkshire’s stock, Buffett explains his change of mind this way:
“I worried in the past that people would be enticed by the stock price. I’m less worried about that.” He adds ruefully, “in fact our recent record will help with that.”
This generates laughter and is precisely the kind of self-deprecating remark by which Buffett diffuses even mildly contentious questions—and it works here today: he calls for the next question.
The shareholder moves his question gingerly outside the realm of stock splits: “Why Burlington Northern, and not Union Pacific?” he asks.
“They’re both wonderful railroads,” Buffett responds, in his usually tactful manner. (Unless the subject is greedy investment bankers, remorseless mortgage brokers or Greek-alphabet-pushing academics, Buffett follows the Dale Carnegie rule of not to criticize, condemn or complain.)
“And there’s no way one will do better or worse…their fates are locked,” he says.
Then, getting to the heart of the question, Buffett says, “I like the western railroads a little better. If you look out 10 or 15 or 20 years, the West will grow a little faster.”
Clearly, he is looking to China and India as engines of worldwide growth.
The next shareholder asks how he will handle the annual meeting when its shareholder attendance—already north of 30,000—is inflated by some portion of those 250,000 Burlington Northern shareholders to whom he will be giving stock.
Buffett smiles and says, “Maybe if Charlie stays home we’ll only have a hundred people.”
There are now shareholders at each of the two microphones, and their questions contain no pretense of staying on the subject of the stock split. In fact, it is the next question, from a local Omaha shareholder, that is most clearly on everyone’s mind: it is about the Kraft bid for Cadbury.
And while Buffett has already this morning been asked a variation on the same question by the Buffett-friendly CNBC anchor Becky Quick, it is here among his most serious admirers that Buffett won’t be able to glibly toss off an amusing response to his favorite talking head.
Buffett, the shareholder notes, has complained about Kraft using “undervalued stock” to buy Cadbury, yet Buffett is using his owned undervalued stock to buy Burlington Northern.
“What are the differences using undervalued Berkshire stock to buy Burlington Northern?” he asks.
Buffett begins to speak, and we listen.
—To be continued...
Jeff Matthews
I Am Not Making This Up
Photograph and Content © 2009 NotMakingThisUp, LLC
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.
