Berkshire Hathaway Inc.'s planned 50- for-1 stock split will put its Class B shares within reach of investors Warren Buffett once called an ``inferior'' class.
The proposed split, announced today as part of Berkshire's takeover of Burlington Northern Santa Fe Corp., would push the price of each Class B share to $US66.51 from $US3,325.35, data compiled by Bloomberg show. Buffett created the equities in 1996 by dividing Class A shares by 30 to prevent fund managers from carving them up in trusts and selling lower-priced interests. The B shares have never traded below $US990.
Even with the dual share system, Berkshire's price has effectively prevented many smaller investors from owning shares in the company outright. While the split may boost attendance at annual meetings and make Berkshire eligible for more indexes, Buffett warned 25 years ago that it might also misalign the goals of the company and its investors.
``Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the existing class of sellers,'' Buffett wrote in his 1983 annual report, when the Class A shares traded for about $US1,300. ``Would a potential one- share purchaser be better off if we split 100-for-1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group.''
He didn't respond to a phone message left with his assistant Carrie Kizer.
Buffett, 79, converted Omaha, Nebraska-based Berkshire to an insurance and investment company from a failing textile producer after taking control in 1965. The Class A shares have risen more than 20 per cent a year since then, turning a $US10,000 investment into over $US50 million and making him the world's second-richest person in Forbes magazine's annual list. They closed today at $US100,450.
The Class A shares trade at a price that's about 30 times higher than the Class B stock and carry 200 times the voting power. To hedge-fund manager Jeff Matthews, who owns Berkshire shares and wrote the 2008 book ``Pilgrimage to Warren Buffett's Omaha,'' increasing the price difference between the classes is a mistake.
``It will bring in a number of shareholders who don't `get' Berkshire and may react irrationally,'' Matthews, who runs Ram Partners LP in Greenwich, Connecticut, wrote in an e-mail. ``Also, it makes it more likely traders will be involved in Berkshire stock, introducing more `noise' into the trading.''
Berkshire's shareholder base will also grow when it issues stock to Burlington Northern investors who elect to receive equity. Among the railroad's biggest owners, Relational Investors LLC and Barrow Hanley Mewhinney & Strauss reported holding in their most recent filings.
Berkshire fluctuates less than most companies in the Standard & Poor's 500 Index, the benchmark measure of US stocks. The Class B shares have a so-called historical volatility, a measure of price swings in the past 30 days, of 16.1, according to data compiled by Bloomberg. That's lower than 475 of the 500 companies in the index, the data show.
Berkshire, whose Class B shares have risen 3.5 percent in New York Stock Exchange composite trading this year, is the biggest US company by market value that's not in the S&P 500. It's worth $US155.5 billion, more than General Electric Co. of Fairfield, Connecticut.
Volume is a criteria considered when S&P evaluates stocks to add to an index, said Maureen Maitland, vice president with S&P's index services. The Class B stock has changed hands an average of 35,734 times a day in 2009, Bloomberg data show. That compares with 3.81 million for Mountain View, California-based Google Inc., the highest-priced stock in the S&P 500.
``Liquidity is a major, important aspect,'' said Maitland, who declined to comment specifically on Berkshire. ``We need to ensure that what we say is going to be added can be priced and is accessible to the market in the way we say it's going to be accessible.''
In his 1983 annual letter to shareholders, Buffett said the benefits of high trading volume are an illusion.
``One of the ironies of the stock market is the emphasis on activity,'' Buffett wrote. ``Brokers, using terms such as `marketability' and `liquidity,' sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). But investors should understand that what is good for the croupier is not good for the customer.''
Most of the shares exchanged for Burlington Northern stock will be Class A shares, Berkshire said in its statement. Splitting the B shares is designed to accommodate the smallest holders who elect for a tax-free swap, it said. Burlington Northern is based in Fort Worth, Texas.
The purchase, the largest ever for Berkshire, will cost the company $US26 billion, or $US100 a share in cash and stock, for the 77.4 percent of the railroad it doesn't already own. Including his previous investment and debt assumption, the deal is valued at $US44 billion, including $US10 billion in debt. The number of Class B shares will rise to 741.6 million from 14.8 million, data compiled by Bloomberg show.
``It's a candidate for inclusion in the S&P 500,'' said Keith Wirtz, chief investment officer at Fifth Third Asset Management Inc., which oversees $US18.6 billion in Cincinnati. Berkshire is the sort of company ``you'd want in an index of the broad market of the US,'' he added.
Buffett negotiated better terms for his September 2008 investment in New York-based Goldman Sachs Group Inc. than the US Treasury got a month later, when it injected capital from the Troubled Asset Relief Program following the collapse of Lehman Brothers Holdings Inc. The government paid $US10 billion, twice as much as Buffett, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg in January.
``People want to invest with Warren,'' said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees about $US165 billion. ``The stock split will certainly make Berkshire more accessible, more affordable, more appealing to investors.''