Berkshire Hathaway Inc.'s recent purchase of $1.2 billion worth of its own stock is prompting discussion, so perhaps a bit of a math lesson is in order.
Berkshire paid $131,000 for each of 9,200 shares to the estate of a deceased longtime shareholder. The Omaha investment company, headed by Chairman and CEO Warren Buffett, said it may buy more of its shares at prices within a limit of 120 percent of its book value per share.
What's that again?
According to a knowledgeable participant in our Tuesday online chats at Omaha.com/buffett, book value per share can be calculated by dividing shareholder equity by the number of shares of stock. Shareholder equity, or book value, is what shareholders would have if the company sold everything and paid all debt.
In its Sept. 30 report, Berkshire listed its shareholder equity at $184.6 billion and its shares at 1,652,184, including Class A and Class B-equivalent shares. Dividing equity by shares gives you the book value per share:
$184,600,000,000 ÷ 1,652,184 = $111,731
To find Berkshire's repurchase limit, multiply book value by 120 percent:
$111,731 × 120% = $134,077
Thus, using the third-quarter figures, Berkshire was willing to pay up to $134,000 for the Class A shares and $89 for Class B shares. (Each Class A share can be converted into 1,500 Class B shares.)
Of course, Berkshire knows its up-to-date shareholder equity figure, so the buyback ceiling today would be different — probably higher because Berkshire gains about $1 billion a month in cash. That's one reason the stock price traded above $136,000 for Class A shares and $90 for Class B shares last week.
Berkshire began buying back the shares last year because it believes the stock was undervalued by the market and was a bargain in relation to other potential investments.
A related bit of discussion: Because 120 percent might be the ceiling on repurchases by Berkshire, many shareholders also view it as a “floor” on the market price. If the stock market ever tries to drive the price below that level, their thinking goes, Berkshire would begin buying shares.
Facebook founder Mark Zuckerberg is moving ahead on his Giving Pledge, donating nearly $500 million worth of Facebook shares to the Silicon Valley Community Foundation.
The San Jose Mercury News reported the 18 million-share contribution, which will support the foundation's efforts to improve access to education and health.
High-tech entrepreneurs Larry Ellison of Oracle and Pierre Omidyar of eBay also signed the pledge, originated by Buffett and Microsoft founder Bill Gates to encourage wealthy people to donate at least half of their wealth to charity.
According to the Chronicle of Philanthropy, Zuckerberg and Marc Benioff of Salesforce.com were among the top 10 philanthropists in the nation in 2010. Last year Ellison and Omidyar were in the top 30.
Interested in iron ore?
Australian Financial Review floated the name of Berkshire's Burlington Northern Santa Fe Railway in an article about Fortescue Metals Group of Australia.
Fortescue, an iron ore company with a rail network linking its mines, may sell a 40 percent stake at a price estimated at $2 billion to lower its debt. It hired Lazard and Macquarie Capital to help find a “passive partner.”
Parts of the deal might attract Buffett's interest. Fortescue seeks a part-owner who wouldn't tell it how to run the company but just wants regular dividends. That fits the Buffett mode of letting Berkshire's managers run their own divisions.
Other possible buyers include Canadian Pacific Railroad, the Canadian Pension Fund Investment Board, the Ontario Teachers Pension Plan, China Railway, China Investment Corp., and railroad companies Genesee & Wyoming, Brookfield and Asciano.
On the other hand, a long list of potential buyers might put Berkshire out of the picture. Buffett doesn't like auctions.
New furniture store
Omaha's Nebraska Furniture Mart isn't the only Berkshire-owned furniture company expanding.
While NFM is in the early stages of its big Texas development, RC Willey has opened its biggest store in Sacramento, Calif., and plans its 14th location in Draper, Utah.
Willey, based in Salt Lake City, became part of Berkshire 17 years ago. Since then, it has opened stores in Boise, Idaho, two in Las Vegas and one in Reno, Nev., and now has 2,400 employees.
“We like to think we're a bunch of local guys still peddling furniture,” CEO Sam Hymas told the Deseret News. “Our management team is the same one that's been together a long time.
“Berkshire Hathaway owns us, but they let us run it. That's Warren Buffett's style. Really, not much has changed. We do business like we've always done business.”
Hymas took over management from Bill Child, a devout Mormon who inherited the company from his father-in-law, Rufus Call (RC) Willey. The stores stuck with RC's never-on-Sunday policy, over Buffett's objection, and expanded nonetheless, the story said.
“We're open from 10 to 9 six days a week. That's a lot. That's enough,” Hymas said. “Our employees need to have the day off to be able to spend time at home with their families. We've had a lot of people from other companies come over to work for us just because of that reason.”
Carol Loomis' compilation of Fortune magazine articles about Warren Buffett, titled “Tap Dancing to Work,” is No. 10 on the New York Times' hardcover nonfiction list.
Other Buffett-related books that have appeared on the list include Roger Lowenstein's biography in 1995, Alice Schroeder's “Snowball” in 2008 and Robert Hagstrom's “The Warren Buffett Way” in 1994 and 1995.
Not on the Times' bestseller list is “An Obscure Family: The Buffetts in America” (Capital Offset Co., 272 pages). It's a genealogy that Warren's sister Doris published recently after 30 years of gathering letters, photographs, diaries and other documents on her French Huguenot-origin family.
Bill Freehling writes from Fredericksburg.com (Doris' Virginia home) that Doris said her brother, 82, was most interested in whether old age runs in the family. As for Doris, she's hoping a younger member of the family will continue the Buffett research. “It's hugely fun if you have a curious mind. It was a wonderful adventure.”
You can find the limited-edition book (400 were printed) on Amazon.com and the Griffin Bookshop in Fredericksburg at $125 for signed copies, $115 for unsigned. Proceeds go to Doris Buffett's Sunshine Lady Foundation.
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.
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