Bloomberg News

Buffett Likens Buyback to Getting Dollar Bills for 90 Cents

October 04, 2011

(Updates share price in sixth paragraph.)

Oct. 4 (Bloomberg) -- Warren Buffett, who announced plans to repurchase Berkshire Hathaway Inc. shares for the first time in four decades, said he won’t pay full value for the stock.

“If I can buy dollar bills for 90 cents, I’ll buy them,” Buffett, 81, said today at Fortune magazine’s Most Powerful Women conference in Laguna Niguel, California. “I want to warn the people that are selling to me that I believe I am buying their dollar bills for 90 cents.”

Buffett targeted a new use for Berkshire’s cash after the firm’s shares plummeted to a 20-month low in September. Buffett, Berkshire’s chief executive officer since 1970, previously used profits to buy companies and securities issued by other firms. Omaha, Nebraska-based Berkshire may have the capacity to buy back $15 billion of stock, Jay Gelb, an analyst with Barclays Plc, said in a Sept. 26 research report.

“For the indefinite future, if we can buy our stock at something of a discount from its real value we’re going to do it,” Buffett said. “If I can find something else even cheaper I may be doing that too.”

Berkshire Class A shares slid under $100,000 on Sept. 22 for the first time since January 2010. The company’s catastrophe reinsurance business posted a loss in the first half on claims from Japan’s costliest earthquake. Buffett’s equity-derivative bets have been pressured by declines in stock markets worldwide.

The A shares advanced 4.3 percent to $110,300 at 4:15 p.m. in New York Stock Exchange composite trading. That compares with book value of about $98,700 per share as of June 30, according to data compiled by Bloomberg. The company may report third- quarter data next month.

Acquisitions

Earnings from Berkshire’s businesses have grown to about $1 billion a month, and finding uses for that cash has become more difficult, Buffett said in April. Last year, Buffett bought the 78 percent of railroad Burlington Northern Santa Fe that his firm didn’t already own in a $26.5 billion deal, funded partly by issuing Berkshire stock. Berkshire acquired engine-additives maker Lubrizol Corp. last month for about $9 billion.

Berkshire will buy back Class A and Class B shares for as much as 110 percent of book value, a measure of assets minus liabilities, and refrain from any repurchase that would push cash holdings below $20 billion, the company said in a Sept. 26 statement. Berkshire had about $47.9 billion in cash as of June 30. The stock traded at an average of more than 1.5 times book value since the end of 1999, according to data compiled by Bloomberg.

‘Demonstrably Less’

“I use this figure of 110 percent of book as being the limit because I know that that price is demonstrably less than the businesses are worth,” Buffett said today. “The book value happens to be an understated measure” of Berkshire’s value.

Buffett is preparing Berkshire for its next generation of leaders. His roles as CEO, chairman and investment chief will be split among as many as five people after his eventual retirement. Buffett hired Todd Combs and Ted Weschler from hedge funds to help oversee a stock and bond portfolio of about $100 billion and may add another money manager. Berkshire said in February it has four candidates for CEO, without naming them.

--With assistance from Maryellen Tighe in New York. Editors: Dan Kraut, William Ahearn

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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