Analysis of Berkshire Hathaway Inc Activity - Essay Example

s of Warren Buffet The funds s being examined is Berkshire Hathaway Inc. (Berkshire) group of companies. This particular institution has been chosen as Mr. Warren Buffet is its Chairman of the Board and Chief Executive Officer. He has been an officer in it since 1965 i.e. he has been running it for nearly 44 years. He holds the current position since 1970 prior to which he was the director of the company. Apart from this he is also a director in Washington Post Company. It is basically an umbrella investment company having a large number of subsidiary companies. These subsidiary companies are engaged in a wide range of business activities. The main ones are primary insurance and reinsurance business. Over the years it has acquired a myriad of subsidiaries engaged in diverse business operations like utilities and energy (MidAmerican Energy Holdings Company), manufacturing-service-retailing (Marmon group), wholesale distribution & logistics (McLane), jewelry (Ben Bridge Chain), carpets (Shaw Industries), bricks & boots (Justin Industries). The insurance (both primary and reinsurance) business is through more than sixty national and overseas enterprises. Berkshire being primarily in insurance business in effect means that the premium for undertaking risk generates cash which is available for investment when the opportunity knocks. The reputation of Mr. Buffet has been built over the years is due to the fact that he has been consistent in picking winning opportunities by and large. This translates into the fact that almost of the business acquisitions turn out to be profit making ones, which in turn swell the coffers of Berkshire to be ready to invest. Contrary to expectations and common belief, Berkshire does not invest by only trading in stock i.e., picking stock at low price and selling, but also by investing in the businesses and earning through their operations. “For some sellers Berkshire is a refuge, a place to land when, say, some members of a family that controls a private company want cash and others wish to keep running the business. To the latter Buffett promises independence and respect and then--barring some irreconcilable problem that just has to be dealt with--delivers on the commitment. "We dont have any MBAs running around telling these people what to do," Buffett says. "And God knows I wouldnt know what to tell them." To public companies that may also have a family reason for selling, or that just want to escape the cold world of regrettable stock prices, unrealistic quarterly demands, and unfriendly suitors, he is equally a haven (Loomis).” To illustrate how this institution helps act as a financial intermediary let us look at one investment made under the Berkshire umbrella as evaluated by Fitch: “On Sept. 2, 2009 Capmark Financial Group and Capmark Capital entered into an Asset Put Agreement with Berkadia. The put agreement is an intention to sell Capmark Servicing in its entirety to Berkadia. Berkadia is a newly formed entity owned by Berkshire Hathaway Inc. and Leucadia National Corp. Berkshire Hathaway has a long-term Issuer Default Rating (IDR) of AA+, with a Negative Outlook from Fitch. Leucadia National Corporation has a long-term IDR of BB+, with a Negative Outlook. Currently, Capmark Financial Group is rated C by Fitch. The acquisition will bring financial stability to the servicing platform. In addition, Berkadia will be capitalized with in excess of $1 billion in available cash by Berkshire Hathaway. Berkadia is purchasing the entire company with plans to retain substantially all staff and ultimately grow the business. Berkadia intends to hire substantially all of the current employees of Capmark, has no plans to change management or the business plan, and provides financial stability to the servicing platform.” On going through the above mentioned report by Fitch rating, it is clear that Berkshire through Berkadia is stepping in at a time when the financial stability of the servicing platform needed to be strengthened. Through this investment the long standing reputation of Berkshire is being maintained as that of the long term player in investing in business which is being taken over for the value it offers in its operations and growth through ongoing business plans. Thus the change transition as usual is expected to be smooth with assurance to the existing manpower that the top guns in Berkshire have full confidence in the enterprise. Another instance of Berkshire coming to the rescue as financial intermediary is of high profile Goldman Sachs. It is widely believed that had Lehman Brothers been able to offer good enough terms they too could have been bailed out from the brink of precipice. Coming back to the case of Goldman Sachs, the investment was structured as investment of 5 billion dollars in preferred shares carrying 10% rate of interest and warrants with an option to buy another 5 billion dollars of common shares at $115 each in five subsequent years. The fact that it was a great price from investor point of view is obliterated by the fact that this conglomerate had enough funds at its disposal to dip into during times of liquidity crunch and confidence enough in the management of the investment bank to bail out the investment firm in terms of crisis. The more than expected earnings in the second quarter this year to the tune of $3.44 billion of Goldman Sachs only strengthens the reputation of the Berkshire group and its mentors. This reputation immediately helped kindle faith and confidence of people in the financial sector. This institution was on the verge of collapse and a little support from Berkshire and government has helped it to tide over the difficult times and miraculously post record earnings within a short span of time. All this has not only helped the management regain its reputation but put confidence and optimism back in the economy about the road to recovery being in sight. These institutions have even started to repay the bailout funds received as assistance under Troubled Asset Relief Program (TARP) to the government. As opposed to this Lehman Brothers could not survive and were sold off in pieces picked up by banks like Barclays to disappear forever. It can be seen that under the patronage of Mr. Buffet Berkshire has helped a great institution like Goldman Sachs to tide over difficult times and come out stronger. Now going a step further, Goldman Sachs and Mr. Warren Buffet have entered into another seemingly philanthropic partnership which has been nicknamed 10,000 small businesses. This partnership shall advance 300 million dollars to Community Development Financial Institutions (CDFI) which have mandate to advance funds for financial and technical assistance to small business enterprises. Another 200 million dollars have been put in for formal training of budding entrepreneurs. First such initiative was undertaken in New York for CDFI funding (Seedco Financial Services) and a community college (La Guardia Community College). It is widely believed that the leverage of dollar from the CDFI fund is around 15 to 17 times i.e. each dollar of investment from CDFI attracts at least 15 dollars of outside investment. At times like the present wherein the green shoots of economic recovery need to be nurtured this kind of funding would go a long way in ensuring trickle of liquidity to the people who perhaps need it the most. We can say that the performance of both Berkshire and Goldman Sachs has been nothing less than spectacular. In a time of liquidity crunch when the only place for refuge was government, Berkshire Group was sounded out by many a failing bank manager to come to their aid. The one that was backed by them ultimately turned out to be a star perfumer in these trying times. It cannot be emphasized enough that success of Goldman Sachs has added a lot of buoyancy to the markets, economy and restored the faith of people in the government to get it right in the end. Works Cited Loomis Carol J. FORTUNE Magazine February 19, 2001. Web December 15 2009 Fitch: Proposed Sale of Capmark Svcg Rights to Berkadia Would Not Affect Rtgs of Various CDOs Business Wire  October 15 2009. Web December 16 2009 Read More