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Thursday, December 13, 2012

Tilson Rips WSJ Article On Berkshire Buyback

From an e-mail Whitney sent to his followers:


2) David Reilly of the WSJ usually writes good stuff, but his Heard on the Street today (full text below) on Berkshire’s share buyback falls far short of his usual standard:

a) “But they should be asking why Mr. Buffett has decided to play Santa Claus. First, why pay a premium for the block of stock?” In buying back stock at a 27% discount to our estimate of IV ($131k vs. $180k), he’s not playing Santa Claus for the seller, but rather for shareholders! I’m delighted that he was able to buy back such a large block at such an attractive price.

Maybe Buffett could have squeezed the seller for a couple of percent, but I’d rather he didn’t because now set a valuable precedent: the many other big sellers in coming years (as long-time holders die) know to call Buffett first and, as long as the price is at or below 120% of book value, he’s likely to give them a fair (market) price. Berkshire could end up buying back A LOT of stock this way.

b) “the sale of 9,200 shares would be equal to about 17 days' worth of trading” This comment misses the fact that the B shares trade $400 million per DAY (and A shares can convert to B shares; just not the other way), so the block being sold represented less than THREE DAYS of trading volume (not 17). Also, the relative illiquidity of the stock cuts both ways: it makes it very hard for Buffett to buy back much of his stock in the open market, so it’s great for shareholders when he has the opportunity to buy big blocks.

c) This is just plain silly on many levels:
There is also the question of why Mr. Buffett decided to increase the price limit for repurchases. Granted, any threshold is an arbitrary measure, and Mr. Buffett has gone further than most other executives in setting such a target. Yet having done so, suddenly changing it demands an explanation.
First, adjusting the buyback limit from 110% to 120% is hardly a dramatic change that “demands an explanation”, especially when very sensible shareholder and analyst knows that Berkshire’s IV is higher than 120% of book (how much higher is open to spirited debate).

Second, as the article itself points out, Berkshire is unique in setting a specific price at which it’s willing to buy back shares, so rather than criticizing Berkshire, the author should instead be calling on other companies – which, in general, destroy value by buying back stock at peak prices – to follow Berkshire’s lead.

d) “The mystery around Berkshire's moves is even greater since the company didn't disclose the identity of the selling shareholder. That leaves open questions of the seller's connections, if any, to Mr. Buffett.” This would be a valid point if Buffett paid a premium – or wasn’t willing to buy other sellers’ shares at that price. But I’d bet my last dollar that if someone called Buffett today and wanted to sell another $1.2 billion of stock at $131,000, Buffett would grab it in a heartbeat.

e) “Also, there is the lurking question of whether the billionaire's move helped someone sell out before tax rates potentially increase in the New Year. While that is, again, unclear, it would be incongruous given Mr. Buffett's calls for the wealthy to pay more in taxes.” Oh puh-leeeeese! “Lurking question” my a**! As noted above, this was a win-win transaction: Buffett bought back his stock at a big discount and the seller got instant liquidity at the market price. But if not, the seller could have easily leaked out the stock by the end of the year, so this wasn’t a sweetheart deal.

As for this possibly being “inconcruous” because capital gains and estate taxes are almost certainly going up next year, I checked with a trusts & estates attorney (my wife!) who said that the estate is taxed according to the tax year in which the person died, NOT the year when the assets are sold. So in this case, whether the stock was sold in December or January has no impact on estate taxes.

Ah, you might say, but what about capital gains taxes? Any appreciated stock is stepped up upon the owner’s death, so that’s not an issue here either. If the seller was, in fact, Ueltschi’s estate (see below), Berkshire’s share price on Oct. 18th(the day of his death) was $135,400, so the sale at $131,000 actually triggered capital LOSSES!

More broadly, I continue to scratch my head when, every time Buffett does anything that has any tax benefit to anybody, certain people saying he’s a hypocrite or has nefarious/self-serving motives. I fail to see the hypocrisy in Buffett: i) saying that taxes on the wealthy need to be raised to help close our massive deficits; and ii) taking actions to minimize his own taxes (by, for example, giving his fortune away to charity – and making enormous efforts to encourage others to do the same).

3) So whose estate sold the stock to Berkshire? My best guess would be Albert Ueltschi’s (see below for a nice profile of him). The timing is right: he died on Oct. 18thand it takes a few months for the lawyers and heirs to sort out big estates. He sold FlightSafety to Berkshire in 1996 for $1.5 billion. He owned 37%, so that’s $555 million, and he took Berkshire stock, which then was around $33,000/share, so that’s a four-bagger since then (9.1% compounded over 16 years), so the $555 would be $2.2 billion. Which means he either sold nearly half (unlikely) or his estate only sold a bit more than half (or maybe it was some other seller).

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