Time for Buffett to consider a Berkshire breakup

2 min read

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.