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Berkshire Hathaway : company profile

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Berkshire Hathaway is an investment group which owns a wide range of businesses engaged in numerous different activities. Wholly owned subsidiaries include Geico Insurance and Fruit of the Loom as well as MidAmerican Energy, NetJets aircraft rentals, International Dairy Queen restaurants and Benjamin Moore paints, among many others, and the group has large stakes in US corporate giants including IBM, Apple and Coca-Cola. Berkshire serves as the main financial vehicle of the legendary "Sage of Omaha" Warren Buffett, the world's wealthiest stock picker. Traditionally, the most important of Berkshire's holdings has always been in the property and casualty insurance industry. However, more recently, Buffett has pushed into other areas, making his biggest investment to-date in 2009 with the purchase of railway company Burlington Santa Fe. Other substantial deals have come thick and fast. In 2013, Berkshire supplied most of the ready cash for the private buyout of food giant Heinz by private equity firm 3G Capital. Towards the end of 2014, Buffett agreed to acquire the free-standing Duracell battery business from P&G for around $2.9bn net. A few months later, Heinz announced plans for a reverse takeover of Kraft Foods. Berkshire remains the biggest shareholder in the combined Kraft Heinz Company. However poor performance by that company left a huge dent in Berkshire's results in 2018. See also

Advertising

Click here for Adbrands Account Assignments for Berkshire Hathaway. In the US, Kantar (in Advertising Age) reported combined measured expenditure for Berkshire Hathaway's numerous subsidiaries of $1.85bn for 2016, out of an estimated total of $1.93bn. By far the biggest proportion of the spend was by Geico at $1.3bn. All advertising is decentralised, managed by each of the group's separate trading businesses.

Brands & Activities

Warren Buffett, who will turn 90 in 2020, still runs the group with business partner Charlie Munger (90 in 2014). In 2006, Buffett made an irrevocable commitment to leave the largest part of his considerable fortune to the charitable foundation run by Bill Gates and his wife.

For several years, David Sokol, a senior investment manager within the company and chairman of several of its biggest subsidiaries, had been seen as a likely candidate to succeed Buffett. However he resigned unexpectedly during 2011. It subsequently emerged that he had been a shareholder in a company acquired by Berkshire Hathaway during that year, creating a potential conflict of interest. In early 2012, Buffett announced that he had chosen his successor, but did not name that individual. In Jan 2018, divisional leaders Gregory Abel and Ajit Rain were promoted to joint vice chairmen, dividing the company's various subsidiaries between them, and making one or other (or perhaps both) a virtually certainty to succeed Buffett as CEO.

Berkshire Hathaway was originally a textile manufacturing company in New England, formed from two companies (Berkshire Fine Spinning Associates and Hathaway Manufacturing) with roots dating back to the 19th century. It was acquired by Buffett in 1965, and converted into a holding company for his investment portfolio. It is entirely decentralised - there are no central management functions - and is involved in numerous different market sectors. Traditionally the most important of these has been property and casualty insurance, conducted on both a direct and reinsurance basis through a number of subsidiaries including auto insurer Geico and two of the world's largest reinsurers, General Re and the Berkshire Hathaway Reinsurance Group.

The group also has extensive interests in the energy sector through what is now Berkshire Hathaway Energy Holdings (previously MidAmerican Energy). This owns stakes in numerous regional suppliers in the US as well as Yorkshire Electricity and Northern Electric of the UK. A collection of real estate brokerage units were combined in 2014 under the banner of Berkshire Hathaway HomeServices, now the #2 realtor group in the US.

Berkshire moved into a more portable form of energy in 2015 through the buyout of battery giant Duracell from Procter & Gamble. The group agreed to swap its existing minority shareholding in P&G, worth around $4.7bn, for the business. P&G at the same time injected $1.8bn of cash into Duracell, making the deal price around $2.9bn net. That deal closed in the second half of 2015.

More recently, Buffett has pushed into other areas, making what was then his biggest investment to-date in 2009 with the purchase of railway company Burlington Northern Santa Fe (BNSF) for a total value of around $44bn. The company owns and operates around 51,000 miles of railroad track, mainly in the Western the US and Canada. (Its main competitor is the Union Pacific Railroad Company). The group also owns the massive wholesale distributor McLane Company. Chemicals manufacturer Lubrizol was acquired in 2011, and is now accompanied by a a huge collection of other industrial manufacturing concerns. These include Marmon Holdings, IMC Metalworking and carpet manufacturer Shaws Industries.

Another comparatively new area is media. Towards the end of 2011, Buffett acquired his local newspaper, the Omaha World Herald, for $200m, and then agreed the following year to spend a further $142m to buy a portfolio of more than 60 regional newspapers from conglomerate Media General. The largest is the Richmond Times-Despatch.

Berkshire Hathaway's numerous non-insurance subsidiaries include Benjamin Moore paints, carpet manufacturing giant Shaws Industries, Fruit of the Loom apparel, HH Brown Shoe Group, NetJets passenger jet rentals, Nebraska Furniture Mart, Helzberg Diamonds and Ben Bridge Jeweler, See's Candies, restaurant chain International Dairy Queen and PR and news distributor Business Wire. Berkshire Hathaway Automotive is the 4th largest auto retailer in the US, based mainly in Arizona and Texas, and operating dealerships on behalf of 27 different car and truck brands.

The group also owns investment shareholdings in large corporations. One of the biggest was generated by Berkshire's role in the private buyout of food giant Heinz in 2013 for a total of $28bn including debt. Berkshire ended up with around 50% of equity, but the lead investor is private equity group 3G Capital. In 2015, Heinz announced plans for what was effectively a reverse takeover of larger rival Kraft Foods, that gave it back a public listing. Berkshire Hathaway and 3G injected an additional $10bn in capital to retain a 51% holding in the enlarged group. Berkshire and 3G jointly control the business, but the former has a slightly larger equity stake with almost 27% of shares.

Among Berkshire Hathaway's most profitable minority investments by the end of 2018 were 9% of Coca-Cola (an unrealised gain of almost $18bn), 18% of American Express (a gain of $13.2bn), almost 10% of Bank of America and the same of Wells Fargo (gains in excess of $10bn apiece). Its single biggest holding by value is 5% of Apple (worth $40.3bn). There are many other major holdings in companies including US airlines Delta, Southwest and United. In 2008 the group part-funded the acquisition of gum manufacturer Wrigley by Mars by acquiring a 20% preference interest in the smaller company. Those shares were bought out by Mars in 2016.

Also in 2008, Buffett lent his support to defending what he called the "economic Pearl Harbor" which savaged the banking industry, acquiring $5bn of preferred stock in investment firm Goldman Sachs, as well as warrants to purchase a further $5bn at any point over the next five years. However a $7bn gamble on shares in oil company Conoco Phillips lost the group around $2.5bn by the end of 2008.

Financials

Proving that not even the Sage of Omaha could have foreseen the economic problems of 2008, Berkshire Hathaway reported the worst results in its history for that year. Consolidated revenues fell 9% to $108.8bn, while net earnings more than halved to just under $5.0bn. There was a recovery in 2009, and though performance improved over the following years, the group consistently underperformed in terms of investment return to its shareholders when measured against that offered by the S&P 500 index. Warren Buffett apologised for that fact in 2013, despite strong results for 2012, in which revenues rose 13% to a record $162.5bn, while net earnings jumped 44% to $14.8bn, finally overtaking the previous record set in 2007. There was an impressive increase in performance for both 2013 and 2014. Revenues hit $182.15bn in 2013 while profits jumped another 31% to $19.48bn. For 2014, revenues grew by a further 7% to $194.67bn, while earnings topped $19.87bn. Net income for 2015 jumped 21% to $24.08bn on total revenues of $210.82bn. Both were best-ever performances.

There was another record year in 2016, with revenues rising to a new high of $223.60bn. However, net earnings dipped marginally to $24.07bn. In financial terms, the group's single biggest segment remains insurance, which accounts for over a fifth of group revenues or $50.4bn in 2016. More than half that total is contributed by Geico. Berkshire's single biggest individual subsidiary is distributor McLane, with sales of $48.1bn in 2016. The most profitable is BNSF with operating income of $5.7bn.

Berkshire Hathaway was one of the biggest beneficiaries of President Trump's tax reform bill, which inflated profits for 2017 by a whopping $29bn to $44.9bn. Warren Buffett highlighted that fact in his letter to shareholders, admitting that "a large portion of our gain did not come from anything we accomplished at Berkshire." Revenues were up 8% to $242.14bn.

Poor performance and a massive 4Q write-down at Kraft Heinz left Berkshire nursing its poorest sets of results for a decade in 2018. In 4Q alone, Berkshire swallowed a $25bn loss from the write-off at Kraft Heinz and various other investment losses. Group net earnings plunged to $4.0bn, despite a 3% increase in total revenues to a record $247.8bn. The group has a cash pile of $112bn.

Last full revision 26th July 2017

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