Published: November 3, 2009
Berkshire Hathaway (NYSE: BRK-B) is set
to take off.
The news that uberinvestor Warren Buffett's holding company
would take over Burlington Northern (NYSE: BNI) in a $44
billion "all-in wager on the economic future of the United
States" has made headlines around the world.
Everyone says it's Buffett's biggest deal.
Everyone points out that Buffett looks to have bought near the
Everyone is talking about the premium that Burlington's
investors will receive.
All true, I say, and maybe even marginally interesting.
But those three water-cooler factoids aren't the part of the
deal that's going to affect your portfolio.
The most important thing -- the part that presents a real
opportunity for you, today -- is the split.
A "split" is a common Wall Street strategy that affects the
number of shares and their price but not the company's overall
market capitalization. If a company has a million shares each
worth $50, it's a $50 million company. If the board of directors
changes the structure of the stock and decides to have 50
shares, each is now worth $1 million. The company has the same
market cap -- both companies are worth $50 million -- but the
ownership structure changes.
A "reverse" split is also possible: That occurs when companies
reduce the number of shares outstanding, such as issuing one
share for every five. The price of an individual share rises,
but, again, the market cap stays the same.
Splits and reverse splits can have serious repercussions. It
changes who can own the company. If a penny stock engineers a
reverse split, for example, then it can be held by institutions
that have arbitrary minimum share price thresholds, which tends
to raise the price. If Berkshire splits, you and I can own it
without mortgaging the house and selling a kidney, and we bid up
the shares as we seek to add a heretofore unavailable investment
-- in one of the most respected companies in the world -- to our
Berkshire is splitting its Class B shares. Buffett has opted for
a 50-for-1 split. Investors who own one share worth $3,200 will
receive 50 shares worth $64 each. The amount of market cap stays
the same: $64 times 50 shares is $3,200, the original price of
the B share.
Berkshire has never split its shares, so this is a first.
Beyond that historical milestone, the split means something
else. It will, for the first time, put direct ownership of
Berkshire Hathaway into the hands of the average investor.
Very few investors can afford the platinum-tinged A shares. And
a round lot of B -- that is, 100 shares -- is roughly the same
price of a new Rolls-Royce Phantom. Many investors think twice
before buying one share of Berkshire. Now they can buy 100
shares of Berkshire for about the same price as 100 shares of
United Technologies (NYSE: UTX) or Schlumberger (NYSE:
Now, investors who thought they
could never afford Berkshire
Hathaway will be able to buy it. And
for the first time in many, many
years, Berkshire could well start to
look like -- and be valued like -- a
growth juggernaut instead of like a
staid and stodgy insurance
Watch, my friends, as Buffett mania
sweeps the Street.
It's happened before. Buffett
famously sat out the tech boom and,
after a dismal prediction in Sun
Valley, Idaho, in 1999, the Oracle
of Omaha outright offended many
upstart entrepreneurs with his harsh
assessment of their businesses,
which he basically said were doomed
to fail. A "new paradigm," Buffett
said, is "like new sex. There just
isn't any such thing."
The Nasdaq was at 2800 at the time
of his first prediction and the
tech-heavy index would nearly
double, peaking above 5000. But then
it would fall just as quickly, as
Buffett's prophesy came to pass. The
Nasdaq has never regained its
heights. Buffett was cheered by the
investing class, Berkshire had a
couple of great years and the Sun
Valley speech is now taught in
Welcome, friends, to Buffett 2.0.
And watch, I implore you, as this
wise Midwesterner is once again
proven remarkably prescient by this
$44 billion deal. Witness how each
step the economy takes toward
recovery increases the value of this
And watch how everyday investors bid
up Buffett every step of the way.
The opportunity, today, is to buy
Berkshire B shares.
It's selling for $3,300 a share, but
I don't want you to look at it that
way. I predict post-split Berkshire
B will be a $100-$125 stock. The $65
post-split price will disappear
almost immediately, as investors
clamor to own some storied Berkshire
Hathaway -- and a piece of whatever
Mr. Buffett does next.
-- Andy Obermueller
Chief Investment Strategist