Price of Wesco and Berkshire's Future

Berkshire is not going to raise the offer. (Amend that, maybe a tiny symbolic gesture but nothing meaningful.) I don't see any compelling reason why it has to do so (fairness typically is not a reason that makes Warren pay people more money). Berkshire will tender now, and take in whatever shares are surrendered. Berkshire will tender again later whenever the stock is cheap enough. Eventually it will get 10% of the stock and squeeze out the rest. This is what it did with Cologne Re.

In December 2004, Warren said that Berkshire ought to buy in the remainder of Wesco, but it would be "overpaying."  Tangible book value at the time, excluding goodwill but giving credit for deferred tax assets - and not adding any value for insurance "float" - was $298. The stock traded that month at an average price of $368. Therefore, Warren guided the market that he would consider Berkshire to be "overpaying" for Wesco at 124% of book value.

Warren would prefer, obviously, to buy businesses that can be made to earn 20% on capital invested. This metric, if it can be achieved, sustains Berkshire's compounding record. In a slow-growing business, therefore, he's going to try to pay as little premium over book value as he can to make that bogey. Wesco is a unique situation. With ownership of 80.1%, with the economy so depressed, and with investors resigned that Charlie won't be around forever, Berkshire can force investors' hands.

If you are disappointed by the price, think of this as the flip side of those bargain acquisitions you've been getting all these years at Berkshire. Wesco's bargain price today exists partly because some smart money has been trading out.

What I think most of you should be doing is think about what this means for the future of Berkshire, given its two-tier voting structure.  Control of the company will be in a relatively small number of hands when Warren is gone. I would expect the gap between A and B shares to continually widen, but also most of you probably realize that Berkshire will get cheaper, like Wesco, if people begin to anticipate a change in management. And there are probably some other factors I haven't considered. But at least you have a chance to prepare.