Berkshire Hathaway's 1995 AGM At-A-Glance
“If you learn reasonably well from other people," said Buffett, "you don’t have to get any new ideas or do much on your own. You can just apply the best of what you see.”
Welcome to the second entry in my AGM At-A-Glance series — in which I attempt to distill the many hours of questions and answers at a particular year’s annual meeting into a more readable and condensed format.
Brevity is the watchword. I will not omit any question or answer, but do try my best to summarize Warren Buffett and Charlie Munger’s remarks in as few words as possible.
Berkshire Hathaway’s annual shareholders meeting in 1995 opened with a vote to authorize the board to issue up to 1 million shares of preferred stock (if needed). “There is no downside to this proposal,” said Warren Buffett. “It’s an authorization. It’s not a command to issue shares.”
Buffett noted that he doesn’t much care how he pays for an acquisition as long as Berkshire gets back something of equal value. Authorizing this preferred stock would simply add another string to his bow in future negotiations.
“If the worry is that we will do something dumb in issuing the preferred stock,” he said, “that’s a perfectly valid worry. But you should worry just as much that we’ll do something dumb in terms of using cash or common stock.”
Buffett then took a few questions from shareholders about the preferred stock authorization before proceeding with the official vote.
Q1: It strikes me that the preferred stock isn’t really cash. It’s fiat currency that, until we vote in the affirmative, doesn’t exist. If preferred stock is authorized, won’t the value of our holdings be diluted?
Buffett pointed out that the same can be said for common stock — but that it’s only dilutive if the shares are created at the wrong price and Berkshire receives less value in return than it gives. “If we issue $200 million worth of preferred and we receive a business that’s only worth $150 million,” said Buffett, “there’s no question you’re worse off than before.” But that goes for cash and common stock, too.
Q2: With the preferred issue, the common shareholder moves to the back of the line. Why should the common shareholder agree to that?
Buffett countered that this would also happen if Berkshire borrowed money to pay for an acquisition in cash — with the bank cutting to the front of the line. “The preferred is a form of quasi-borrowed money that does rank ahead of the common shareholder,” he said. “But, at the same time, we’re adding a business which we think is going to benefit the shareholder. That’s the trade-off.”
Q3: It is my understanding that if the amount of shares issued for a conversion of a convertible issue is greater than 20% of the total amount of shares outstanding, then it would require a vote of the stockholders?
It would take a $5+ billion deal for Berkshire to trigger this particular NYSE rule. “The chances of any acquisition being large enough so that it requires a shareholder vote is probably slim,” said Buffett, “but it isn’t because we wouldn’t be interested.”
Q4: Berkshire owns preferred shares of Salomon, USAir, American Express, etc. Did those shareholders have to vote on the terms of the preferred shares that you bought for those companies?
None of Berkshire’s preferred stock purchases required a vote of that company’s shareholders. Buffett said that the only deal he’s made that needed to be approved by the other side’s shareholders was with Cap Cities/ABC in 1985.
Q5: A recent issue of Barron’s indicated that it may be possible to issue a best-of-all-possible-worlds preferred — one where the dividend looks like tax-deductible interest to the issuer and the purchaser would qualify for the dividends received deduction. Do you think that structure might be possible with these shares?
“I know what you’re talking about on that,” said Buffett, “but I don’t think it would be possible.” Charlie also chimed in: “We probably wouldn’t try and be that cute.”
Buffett noted that too many companies make a fuss about accounting treatments — pooled vs. purchase — when pursuing a deal. “We care not a wit about the accounting treatment that we receive,” he said. The focus should be on finding the right business.
Q6: Will there be any opportunity for shareholders who find the preferred issue preferable to participate in that?
“If we ever thought that enough people might want it, we could offer it,” said Buffett. “But no one would be obliged to take it.”
The preferred stock authorization was then put up for a vote — and easily passed. (Albeit with tens of thousands of votes less than the individual directors received.)
Warren Buffett then announced that the acquisition of Helzberg Diamonds had closed the day before. “Their sales per store, on roughly equivalent square footage, will be very close to double what competitors achieve,” said Buffett.
With those two matters out of the way, Buffett moved on to the traditional Q&A…