Berkshire Hathaway

 So far a lot of the attention, well, okay, nearly all the media attention, has focused on the Sokol Debacle (I hate the term, Sokol-gate). There will be some other things going on. Just a few thoughts.

 First shareholder suit. Here's the filing http://www.scribd.com/doc/53362856/kirby-v-sokol 

Lot of accusations and fairly typical of this kind of lawsuit. However, this is Warren Buffett and this is Berkshire Hathaway and the subject is governance and insider trading -- this is no ordinary derivative suit. Key points:

 It's now just over 3 weeks until Berkshire's annual meeting, at which 3 journalists will ask Buffett questions submitted by the audience. The journalists are:

> Becky Quick. Has put away the pompoms. Taking a sober, detached and traditionally journalistic stance toward Berkshire/Sokol/Buffett.

 As things settle out and the attention shifts to Buffett, it is clear that a handful of questions have bubbled to the top. These questions are very painful for Berkshire shareholders and longtime Buffett-followers to consider. Even raising them is likely to earn brickbats. Nonetheless, it is essential to put a clear summary of what is at stake on the table. The following questions in subtle or less-subtle form are already being raised -- not merely by me, but in other editorials, in blogs, on discussion threads, and in private conversations.

Berkshire's March 30 press release included a message from Buffett that said (emphasis added), "Late in the day of March 28th I received a letter of resignation from Dave, delivered by his assistant...I had not asked for his resignation, and it came as a surprise to me... I did not attempt to talk him out of resigning and accepted his resignation. Effective with Dave's resignation, Greg Abel" will run MidAmerican, and then other management changes were given. 

 This just in -- Moody's cites Sokol resignation as a risk to Berkshire because of "governance challenges that may impact credit quality." There are several issues on the table whether specifically raised by Moody's or not:

> Recent events have been a huge embarrassment to Berkshire, exposing the need for more stringent vetting and oversight of possible CEO candidates.

In a recent interview, Buffett suggests that the board would approve Ajit Jain as the next CEO of Berkshire, and he would love it if Ajit would take the job (if he volunteers).

 This just in: a former Goldman Sachs director has been charged with insider trading in the Galleon case -- for, among other things, leaking the information he learned, as a board member, that Berkshire Hathaway was going to invest $5 billion in Goldman during the financial crisis.

 Buffett has some nice praise for NetJets in the annual report. Following is an analysis of the significant new elements of the report (some were repeated from last year).  To begin with, “I can’t overstate the breadth and importance of David Sokol’s achievements at this company…” Let me also state at the outset that I do not want a round of anybody-bashing to begin on this comment page for the sake of venting. Please comment if you have something substantively new to add. Now let's just move on to analyzing the results.

Buffett has studied banking all his life -- he likes being in the position of the guy who has the money and gets paid to let other people use it. (He also likes being in the position of getting paid to use other people's money -- Buffett likes to win either way, but i digress.) Buffett would really love for Berkshire to own a bank outright, but it can't, legally. So Berkshire buys bank stocks and performs as many bank-like functions as it can.  Berkshire Finance is where many of these functions take place.

Everybody knew it was coming but the results had to be seen to be fully appreciated. In the annual report released this morning, just about every page spoke of how Berkshire produced an outstanding year. And you can almost certainly count on more of the same in 2011, because the economy is slowly recovering, BNSF will be consolidated for the full year, and interest rates are rising (even if only a tad so far). With that perspective, let’s consider some of Buffett’s comments.

Preparatory to the annual report's issuance on Saturday, Friday's Financial Times features the following editorial I wrote about the urgency of the succession issues at Berkshire. How the $166B investment portfolio (and derivatives book) will be managed, the ever-shifting list of names on the hypothetical list of internal CEO candidates, and the question of who will serve as non executive chairman after Buffett should all be at the top of investor's minds.

 In answer to one of your questions, would Buffett buy Mars? The answer is, yes, in his dreams. He partnered with this family-owned company to fund its acquisition of Wrigley's. Buffett would love to buy Mars... at the right price. It is (generally speaking) run on Buffett-like principles. It owns several of Buffett's most admired brands, including Snickers, which he has cited as the chocolate bar that is immune to competition, and M&Ms.

 This new story is as good example as I have ever seen of why Buffett has been wise to use the same tightly scripted ways of explaining his investing style for decades. Here, Buffett is trying to make a point he has repeated for years (a wonderful business can survive a bad manager; the best manager in the world can't save a doomed industry). For once, he uses slightly different words than usual.

 The radio show This American Life believes it has truly, authentically, legitimately cracked the secret Formula X recipe for Coca-Cola (see story here). If the ingredient list is to be believed (nutmeg oil, neroli) you're better off not trying this at home. It's a lot cheaper to acquire the elixir a six pack at a time.

According to a Wall Street Journal editorial,  the SEC recently gave General Re's former CEO, Joseph P. Brandon, vindication in the form of a "termination letter" saying that they were not taking any action against him in connection with a finite reinsurance transaction between Gen Re and AIG in 2000. Appeals are pending on convictions of five other people who were charged on criminal counts in connection with this deal.

 News for Munger fans: Charlie Munger will do an "Afternoon With Charlie" in Pasadena this year after the Berkshire buy-out. I am asked several times every year by different people whether the trip to Wesco is worth it. My answer has always been "Yes, and go now because it won't last forever." This is an opportunity to say it again: to anyone who has ever contemplated it but put it off, didn't have time, etc. etc.

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.

From LA Times.

Start your calculators. What do you think of the price? I would throw out Cort goodwill as valueless but give credit for deferred tax assets = BV of $348/share excluding "float." Berkshire's paying a slight premium to this -- it's not surprising that the stock has traded up to $363. As I read the rules Berkshire does not own enough WSC stock to force a squeeze-out.

With reservations, I bring you the inevitable blog post about the famous WSJ story on Li Lu. Let me caveat this by saying that even good reporters like Susan Pulliam can't cover all the nuances in a short article, especially because the people involved probably aren't telling her everything. There may be important things left out. With that said, here's the unvarnished gist of it: