Berkshire Hathaway's 1996 AGM At-A-Glance
“Why go around trying to bet on things we don’t know,” asked Buffett, “when we can bet on the simple things?”
Welcome to the next 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 have not omitted any question or answer, but instead tried my best to summarize Warren Buffett and Charlie Munger’s remarks in as few words as possible.
Berkshire Hathaway’s annual shareholders meeting in 1996 opened with a vote to authorize the board to issue up to 50 million shares of new Class B common stock. These less-expensive shares would have 1/30th the economic rights of Class A shares — but just 1/200th the voting power.
Although Warren Buffett and Charlie Munger had long resisted calls to split the stock, their hands had been forced by the imminent creation of so-called unit trusts that intended to mimic Berkshire itself. They worried that Buffett’s fame and Berkshire’s sparkling past record would draw in less-sophisticated investors with unrealistic expectations — who might then turn around and blame Berkshire when those expectations were not met.
Buffett hoped to short-circuit these unit trusts by making Class B shares available to anyone who wished to buy them. With such a big change to Berkshire’s structure in the offing, he opened the floor up to questions from shareholders about the Class B issuance before proceeding with the official vote.
Q1: When the price is struck on the Class B shares, will those of us who buy our shares through computer programs pay the same price as others for these shares?
“Everybody will pay the same price,” pledged Buffett. And, he noted, a very high percentage of that money will come to Berkshire — not Wall Street. Like its pricier big brother, the Class B shares would also trade in 10-share round lots.
Q2: Will this effectively discourage the unit trusts?
That’s the idea. “I see no way that the unit trust could offer people as efficient and inexpensive a way of participating in Berkshire as direct purchase of the B,” said Buffett. The unit trusts must deal with frictional costs of purchasing Berkshire shares in the open market, selling to customers, etc. All of which combine to make them a less attractive option to just buying Class B shares directly.
Buffett anticipated about 350,000 shares of Class B stock being sold in this initial offering. That’s a lot — but the unit trusts might have sold more by falsely promising that Berkshire would maintain its past level of returns. (Which it could not.)
Q3: In terms of the number of B shares that you’re going to issue, do you plan to just look at the book on Wednesday and issue enough to totally satisfy the demand?
The final number of Class B shares would satisfy any and all demand — based on the latest information on either Tuesday night or Wednesday morning.
Q4: Do you have any plans to do a secondary offering if it starts becoming a hot number?
Nope. Buffett said that the Class B issuance had been “sufficiently publicized” so that everyone interested will have already had their chance to buy the new shares.
Q5: I’ve read that you would not advise your friends and family to buy it at current pricing. Should I tell the same to my friends and family?
Buffett clarified that while he did not consider the Class B shares to be undervalued at current prices, he had not called them overvalued. After all, what kind of a company would issue shares at a price below intrinsic value? “What do you say to your present shareholders,” asked Buffett, “if you go out and say to the public, ‘We’re selling you something that’s worth a dollar and we’re going to sell it to you for 80 cents’?”
“If we sell 1% of the company — and 350,000 shares of B is close to that figure — we are selling 1% of your ownership in See’s Candies,” he continued. “We’re selling 1% of your ownership in GEICO. We’re selling 1% of your ownership in the Buffalo News.”
Q6: Do you have any plans for what to do with the money raised by the share issuance?
There were no immediate plans for how to use the Class B proceeds — and Buffett warned the crowd that he and Charlie never try to match cash inflows and outflows too closely from a timing perspective. The availability of fresh cash would not lower their standards on whether to purchase a business. “You get investment and business opportunities at times that differ from the times that funds come in,” he said.
Q7: You may find that there are substantially more people who are interested in having a piece of you for the sake of saying they have a piece of you than having any idea what they’re doing from an investment perspective. You may be out of touch with the popularity you have.
“My first reaction,” laughed Buffett, “[is] maybe I should tell my barber we could save the clippings and sell them.” In all seriousness, Buffett did not peg his popularity as being at as high a level as the questioner did. And, if the unit trusts proceeded and failed investors in their unrealistic expectations, he might even get the blame.
Buffett explained that the board sought authorization for 50 million Class B shares because there needed to be enough to cover the unlikely conversion of every Class A share. “That’s not going to happen,” he said, “but we still have to be prepared for it.”
Charlie called the whole discussion a bit of a “non-event” because it only added 1% to Berkshire’s share count. “It solves the problem of these disreputable [unit trusts] and, at 1%, what does it matter?”
Q8: Can we buy Class B shares directly from the company?
No, Buffett was only too happy to hand that job off to Salomon Bros. But, he assured shareholders, the costs of this issuance were really, really low. When AT&T spun off Lucent, their percentage costs were more than twice as much as what Berkshire would pay on this transaction.
Plus, selling shares directly would be prohibitively difficult for Berkshire. “It would require a whole group of different hoops to jump through in order to have a direct issue,” said Buffett. It would probably be more expensive, too.
Q9: There were some people trying to form mutual funds to carry Berkshire stock because thousands of teachers and hospital employees are limited to investing in mutual funds. Were you aware of that and, if so, have you considered doing something like that?
Buffett was not aware of that wrinkle — and, as such, had never considered it. He did caution proponents that doing something like that — creating a mutual fund that held only one stock — might be seen as an attempt to skirt the law.
Q10: Have you determined what the symbol will be for Class B shares?
Not yet. Buffett said that Berkshire was working closely with the New York Stock Exchange to come up with the best ticker symbol possible. “I have no favorite name that I’m looking for,” he said, “so we’ll see what ideas they have.”
Q11: You’re authorizing up to 1%. What happens if the issuance goes bananas and it ends up higher? How far could this ballgame go?
“Whatever the size of the offering,” said Buffett, “it affects everybody economically the same.” And, as a result, he didn’t much mind if the issue ended up being 1.5% or 0.75%. The only thing that would hurt shareholders is if the new Class B shares were sold at a price below intrinsic value.
Q12: Does the issuance of Class B shares penalize the Class A shareholders in any way? Will the long-term mindset of shareholders be diminished by these cheaper shares?
Buffett said that he wouldn’t be introducing Class B shares if he thought they would hurt existing shareholders in any way. But, to ensure that new shareholders fully understand the long-term philosophy of Berkshire, he planned to send out a booklet explaining the ground rules and expectations (sort of like an orientation for newbies) so that everyone would be on the same page going forward.
Q13: The unit trusts, as you portrayed them, don’t sound terribly attractive. In the long term, would they have ultimately failed as folks realized that they aren’t all they’re cracked up to be?
“They might have,” said Buffett, “but I think the rub off would have been on us rather than the promoters of the trust.” He worried that investors’ disappointment would be projected onto Berkshire as opposed to the unit trust promoters “who they might not even be able to find at that time”.