BREAKINGVIEWS - Time for Buffett to consider a Berkshire breakup

Fri Apr 29, 2011 2:40pm IST

Berkshire Hathaway's Warren Buffett is pictured in the audience as U.S. President Barack Obama addresses the 2010 Fortune Most Powerful Women Summit in Washington, October 5, 2010. REUTERS/Jason Reed/Files

Berkshire Hathaway's Warren Buffett is pictured in the audience as U.S. President Barack Obama addresses the 2010 Fortune Most Powerful Women Summit in Washington, October 5, 2010.

Credit: Reuters/Jason Reed/Files

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-- The author is a Reuters Breakingviews columnist. The opinions expressed are her own --

By Agnes T. Crane

NEW YORK (Reuters Breakingviews) - Warren Buffett has many unpleasant questions to address at Berkshire Hathaway's annual meeting on Saturday. Former heir apparent David Sokol's stock dealings have raised concerns over the company's internal controls and even about the billionaire's judgment. But one subject may be a step too far for the Buffett faithful congregating in Omaha: Isn't it time to consider breaking up the company?

To Buffett acolytes, the idea of splintering Berkshire into pieces borders on heresy. But furor over Sokol's share trading, resignation and shocking lack of remorse for his behavior has highlighted the difficulty of grooming a successor to the 80-year old Buffett capable of steering the sprawling $200 billion behemoth into a brighter tomorrow. Moreover, a breakup may even be more lucrative for shareholders.

Berkshire's share price is suffering. Over the past six months, the stock has gained 4 percent, significantly underperforming the S&P 500 Index's 15 percent rise. As a result, the discount at which Berkshire shares trade relative to the standalone value of its assets has widened to a point where breaking up can't be ruled out.

A calculation by Barclays Capital a year ago valued Berkshire's holdings at around $87 per class B share. That meant the stock was trading 13 percent below the sum of its parts a year ago. Apply the S&P 500's gain since then to BarCap's estimate, and the shares could be worth around $99. Trouble is, as a result of Berkshire's relative underperformance that means the theoretical discount has increased to nearly 20 percent.

Though a back-of-the-envelope calculation, it does suggest dismantling the group into manageable parts as a reasonable alternative worthy of the Berkshire's board's consideration. The board's report on the Sokol matter, released Wednesday, exhibited an uncharacteristic willingness to challenge the chairman's judgment. It should extend this independence to revisiting the group's structure, too.

Berkshire's stellar returns for most of the past half century reflected its founder's gut instincts, impeccable reputation and eye for value. The Sokol affair suggests these can no longer be counted on, nor easily replicated. Yet without these features, Berkshire is just another conglomerate whose shares trade at a discount to their true value. That would be a sad legacy for Buffett to leave to his adherents.

CONTEXT NEWS

-- Berkshire Hathaway shareholders will attend the company's annual meeting on April 30 at the Qwest Center arena in Omaha, Nebraska.

-- Warren Buffett said on March 30 that he accepted the resignation of David Sokol, one of the executives widely considered a successor to the Berkshire Hathaway chairman. Disclosures of Lubrizol share purchases before Berkshire acquired the company for $9 billion suggest Sokol personally netted $3 million from short-term trading in the deal.

-- The company's board said on April 28 that Sokol violated the company's ethical standards and legal proceedings against the former executive were possible. Sokol's attorney disputed those findings.

(Editing by Rob Cox and Martin Langfield)

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