Relax: Warren Buffett Still Isn’t Revealing His Successor
Fans of Warren Buffett need not worry that the chair, president, and CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) will be going anywhere any time soon — because he isn’t. Although he doesn’t have much to say about the Alibaba IPO, he had a lot to tell Fox Business about his successor.
“Well, the candidates are all internal,” Buffett told Fox Business. “And I’ve said that they are male at the present time, although that would not necessarily be the situation, in the future.” Buffett told CNBC on Monday that he was impressed with General Motors (NYSE:GM) CEO Mary Barra when he met her this past fall at a conference.
Since Buffett’s Berkshire Hathaway owns 40 million shares of General Motors, and he said that he is open to a female successor, Barra may be on his radar. She has been said by many to be handling the current GM recall crisis, and seems to have the leadership qualifications for such a feat. However, Buffett would have some expectations for his successor regardless of sex.
“Now, they’ll do things their own way. And they should. But we have a distinct culture. And we set our economic principles in the back of the annual report,” Buffett told Fox Business. “They haven’t changed, virtually, for 30 years. And we’re a certain type of business. That’s not the only way to run things, but it is the way we run things at Berkshire. And I can’t imagine a successor changing that in a material way.”
He also thinks it would make sense for his successor to live in Omaha. “I think it’s — the probabilities are almost 100 percent,” Buffett told Fox Business.
However, there are other things that worry Buffett, especially the massive derivatives on the balance sheet over at JPMorgan Chase (NYSE:JPM). “Someday, it won’t matter how large the assets on JPMorgan’s balance sheet. There is no risk control that is effective if the numbers get big enough,” Buffett told Forbes. “I don’t believe the reserve they set up against loss in their derivatives. All that netting stuff doesn’t mean anything. I don’t want to be intertwined with any bank as to significant amounts of receivables.”
According to The New York Post, Buffett has also had some harsh words about housing. “Housing is not that strong yet,” Buffett told The New York Post. “I’m surprised by that.” It shouldn’t come as any big shocker given that the commercial real estate sector has not recovered as the demand for businesses to expand remains stagnant and economies of scale are not present for those businesses at this time given the economy only added 288,000 jobs last month, according to new government data released.
However, according to The New York Times, Buffett defends the actions of former Federal Reserve Board Chair Ben Bernanke who held interest rates near zero. This has been said to prolong the housing crisis that continues to occur, mainly in commercial real estate while the residential market has been bouncing back slowly. He, like many other economists, reiterated how dire the financial crisis was and how he publicly defended the government response. But, he said the actions of what new Fed chair Janet Yellen will do remain to be seen.
“This is not a bubble situation at all, but it’s an unusual situation we are living in,” Buffett said, according to The New York Times. While Buffett may not have any plans to leave his business and that seems fine, his concerns towards housing are potent. The commercial real estate market has not rebounded. The only thing that has been is the slow recovery of the residential market because, frankly, there’s always going to be a demand for home ownership for families.
Yet, what is still important is those who lost jobs in real estate trying to help other businesses expand, and that has not been addressed by Congress, the Fed, or anyone else. It is important that for the future of business expansion and the commercial real estate market that we decidedly lower tax rates and decrease regulation to allow for business expansion in these troubling times. When businesses expand, it requires commercial real estate developers to find it properties, hire construction workers, and work with local government to make that all possible. But, this just isn’t happening right now.
Interested in knowing more about the Buffett empire? Earlier, we had written about five companies that are at the very heart of Berkshire Hathaway. These are what Buffett calls the ‘Powerhouse Five’ — “a collection of large non-insurance businesses” that together make up a cornerstone of Berkshire’s empire. Here is a recap:
1. MidAmerican Energy Holding
MidAmerican Energy Holding is — well, a holding company that Berkshire owns the vast majority of. It’s important to remember that the holding company owns a business named simply MidAmerican Energy Company, which is just one of many energy companies such as PacifiCorp, CalEnergy Generation, Northern Natural Gas Co., and — most recently and perhaps most importantly — NV Energy, which make up the holding company’s portfolio.
NV Energy is an energy holding company serving approximately 1.3 million electric and natural gas customers in Nevada. Combined with MidAmerican Energy Holdings, Berkshire owns the largest U.S. utility company in the United States with 8.4 million total customer accounts and total assets of approximately $66 billion. Berkshire owns utilities in Nevada, California, Oregon, Idaho, Utah, Wyoming, Washington, Iowa, Illinois, Nebraska, and South Dakota.
“This acquisition fits nicely into our existing electric-utility operation and offers many possibilities for large investments in renewable energy,” said of the deal in his 2013 letter to shareholders, adding that, “NV Energy will not be MidAmerican’s last major acquisition.” Utility companies fit nicely under the umbrella of reliable “big chunks of earnings powers” that Buffett has targeted for the future of Berkshire.
2. BNSF Railway
BNSF (or, Burlington North Santa Fe) is a vertebrae in the backbone of the U.S. economy. The company operates one of the largest railroad systems in North America, and serves most of the western region of the U.S. Berkshire purchased the company in late 2009 “amidst the gloom of the Great Recession,” as Buffett puts it in the company’s 2013 annual report.
“At the time, I called the transaction an ‘all-in wager on the economic future of the United States,’” Buffett wrote — and that bet is paying off. If we’re sticking with human biology, another apt analogy may be to describe BNSF as part of the circulatory system. At least, it’s the analogy that Buffet prefers. In the 2013 report, Buffett wrote that BNSF carries about 15 percent of “all inter-city freight … Indeed, we move more ton-miles of goods than anyone else, a fact establishing BNSF as the most important artery in our economy’s circulatory system.”
BNSF reported revenues of $22 billion in 2013, up about 5.8 percent from 2012, and net earnings of $3.8 billion, up about 11.8 percent from 2012.
3. ISCAR Metalworking
Iscar is an Israeli toolmaking company with operations in more than 60 countries around the world. Berkshire purchased an 80 percent stake in the company in 2006 for about $4 billion, making it the first time Berkshire had acquired a company based outside of the U.S. Berkshire purchased the remaining 20 percent of the company in 2013 after the Wertheimer family, which founded the company, elected to sell the stake.
“As a truly international business, IMC is a top performer in its industry, with exposure to European, Asian, and Latin American markets, as well as significant opportunities for growth as it continues to penetrate the North American market,” commented Buffett when the deal was announced. “My partner Charlie Munger and I have been impressed by IMC’s simple and profitable business model. With this acquisition, we have the benefit of investing in a stable business with very significant growth prospects.”
Speaking in 2008, when he was attending a ribbon-cutting ceremony at an Iscar facility in China, Buffett said that, “Iscar is a dream deal. It has surpassed all the expectations I had when buying the company, and my expectations had been very high.”
4. Lubrizol Corporation
Lubrizol, founded in 1928, is a Cleveland-based company that also makes stuff that people, you know, actually use. Lubrizol is a designer and manufacturer of specialty chemicals, producing additives and advanced materials for everything from engine oil and industrial polymers to hair conditioners and toothpaste. The company has product lines that touch dozens of markets and are used in the essential day-to-day activities of many businesses and consumers.
Berkshire announced the purchase of Lubrizol in March 2011. Berkshire paid about $9.7 billion for the company, which generated $5.4 billion in revenue the year before the purchase was announced. That year, Lubrizol generated about 35 percent of revenue from North America, 30 percent from Europe, and 30 percent from Asia and the Middle East, giving the company an enormous and sturdy footprint. The company also reported a 34 percent return on equity that year and a gross margin of 33 percent.
“Lubrizol is exactly the sort of company with which we love to partner – the global leader in several market applications run by a talented CEO, James Hambrick,” said Buffett at the time of the purchase. “Our only instruction to James: just keep doing for us what you have done so successfully for your shareholders.” Hambrick, who has been with the company since 1973, is still CEO.
5. The Marmon Group
The Marmon Group is one of those companies that makes stuff. In particular, it makes useful stuff that people actually use, like electrical and industrial components for transportation equipment, as well as some transportation equipment itself, such as tank cars (big storage cars for trains.)
Berkshire purchased 60 percent of the Marmon Group for $4.5 billion in 2007, and has been rounding out his ownership ever since. At the time, it was Buffett’s largest non-insurance acquisition. The deal, which famously took just two weeks to complete, was likely helped by the fact that Buffett was acquainted with the family that owned it.