On Tuesday Standard & Poor’s (S&P) indicated that it plans to include Berkshire Hathaway’s class B shares in both the S&P 100 and S&P 500 indices once the investment conglomerate completes its acquisition of Burlington Northern Santa Fe (BNI) next month.  In actuality, Berkshire will be replacing Burlington Northern in each of the indices.

As I’ve written previously, this decision came about because of Berkshire’s recent 50 for 1 stock split of its class B shares.  Not only will this split allow Berkshire to complete its acquisition of Burlington, but also since it will also increase the trading volume in Berkshire’s shares, the conglomerate has finally met all of S&P’s criteria to be included in its published indices.  This should—and has—created demand for Berkshire’s shares, as the myriad of large funds that mirror the S&P 500 index will now be forced to purchase a block of stock equal to Berkshire’s proposed weight in the index.  This demand for the shares will and has benefited Berkshire’s existing shareholders, and also given the long-term orientation of the index funds, should add a bevy of long-term and stable owners to Berkshire’s registry.

This addition to the index is also somewhat unique in that Berkshire already owns substantial interests in many existing and large S&P 500 constituents—think Coca-Cola (KO), Kraft (KFT), etc.  What this effectively amounts to is sort of cross-ownership in a subset of some of the stronger businesses already in the S&P 500.  What is more, some of Berkshire’s wholly owned businesses—think the proposed acquisition of Burlington—would also be included in the S&P 500 index had they not already be purchased by Berkshire.  So in effect, Berkshire could be thought of as a partial subset of the S&P 500, which is then included—or owned—by the S&P 500 index itself.

Please do send me any comments or questions you may have.

Justin

Copyright © 2010 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

In what was probably a foregone conclusion, Berkshire Hathaway (BRK-B) shareholders today voted to approve Berkshire’s proposed 50-for-1 spilt of its class B shares, which will ultimately allow the conglomerate to complete its proposed purchase of Burlington Northern Santa Fe (BNI).  Given that Berkshire didn’t want to disadvantage small versus large shareholders of Burlington in being able to take a mix of stock and cash when the deal closes, it decided to split its shares.

While splits are generally un-economic events, this split could have an impact on Berkshire’s existing shareholders.  For some time, Berkshire—despite being on of the largest companies in the country—has not been included in the S&P 500 stock index.  Now with the split, as well as Chairman Warren Buffett continuing to gift his class A shares (which each will now convert into 1500 class B shares) to the Bill and Melinda Gates Foundation, Berkshire’s trading volume is sure to increase, and it could someday potentially be included in the index.

Should this eventuate—which it probably will at some point—there could be a huge demand for Berkshire shares given that all the funds that replicate the S&P 500 index would be forced to purchase Berkshire’s shares.  This will also be sure to change Berkshire’s long-term shareholder base, which has been slowly cultivated over the last several decades.  That said, it’s not as if the new shareholders will all become very short-term oriented, and even the eventual index fund buyers would be stable holders of the stock, as well as many of the already existing long-term owners.  In fact, the split could actually benefit those folks too.  Since many are probably in the spending years of their life, it could allow them to slowly liquidate part of their Berkshire holdings.

Other Berkshire News

One of Berkshire’s other stock holdings, Kraft (KFT), recently inked a deal to purchase British confection maker Cadbury PLC.  Just over a fortnight ago, Berkshire publicly indicated that it was opposed to Kraft issuing more shares to complete the acquisition given that Berkshire believed Kraft to be undervalued, which would have made the purchase even more expensive for Kraft.  And today, despite Kraft paying more in cash, Berkshire also said in public comments that it wasn’t overly excited that the deal was consummated.

I don’t think anyone would dispute the strength of the brands owned by both Kraft and Cadbury, but what is being called into question is the price being paid to combine the brands of these two companies.  One would think that there would have to be a lot of growth from the combined entity or a lot of cost reducing synergies (consultant speak) combing these two businesses to come close to justifying the price.  It is further strange that Kraft’s management went ahead with the deal even thought its largest owner wasn’t very hot on it.

Please do send me any comments or questions you may have.

Justin

Copyright © 2010 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

Swiss Re indicated today that it has inked yet another deal with Berkshire Hathaway (BRK-B), this time entering into a reinsurance transaction whereby Berkshire would assume some of the liabilities of Swiss Re’s U.S. life-reinsurance business.

The deal is probably good for both parties, as it will allow Swiss Re to free-up capital to be deployed in other areas.  Given the intense capital requirements in the U.S. life insurance business and Swiss Re’s financial difficulties last year, this is a prudent move for its overall business, and will potentially allow it to expand into more profitable areas in the insurance markets.

For Berkshire, this deal further deepens its relationship with Swiss Re.  Berkshire already owns both common stock and convertible debt in Swiss Re, as well as already having existing reinsurance contracts with Swiss Re, which primarily give Berkshire exposure to the European property and casualty markets.  This deal really won’t move the needle much for Berkshire, but it does give it additional exposure to the life insurance market as well as more premiums to invest over time.

On other matters, Berkshire’s shareholder meeting is set for Wednesday, where shareholders will vote to approve Berkshire’s proposed 50-for-1 stock split, which will help Berkshire to complete its proposed acquisition of Burlington Northern Santa Fe (BNI).  Check back here later this week for any updates on the shareholder meeting.

You also might be interested to know that this blog was mentioned in a Reuters article, which I have linked here.

Justin

Copyright © 2010 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.