acquisition

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#22

I’m pretty confident that Buffett will get an opportunity to deploy that cash at much better
rates, if only by buying much higher yield bonds in the next few months and years.

Perhaps bond yields will be higher, but I’m not convinced real bond yields will be higher.
Maybe yes, maybe no.

Interesting arithmetic quirk:
Consider two situations:
(1) 0.5% yield bonds with inflation at 1.5%, not far from what was the case recently. Seems like a real yield of -1%.
(2) 4.0% yield bonds with inflation at 4.5%, not wildly implausible for the near future. Seems like a real yield of -0.5%.

On the surface of things, option (2) looks better. Not good, but a higher real yield by half a percent. Great!

But in reality option (1) is better because of taxes.
Taxes are applied to nominal earnings, not real earnings.

Option (1) has a real after-tax yield of -1.11%, and option (2) has a real after tax yield of -1.34%.
Assuming a corporate tax rate of 21%.

Of course the real lesson is to avoid all of the alternatives above.
Who wants to own stuff with a negative real after tax yield for any length of time?
Good choice to have dry powder available, but not as an investment allocation.

Jim

16 Likes
#23

“And the liabilities are…?”

Float… long tailed hopefully

#24

…for $848.02 Per Share in $11.6 Billion Transaction

Tangible assets = $30.50bn at December 31.
That’s $32.27bn total assets, minus $753m goodwill and $924m intangibles.

In some ways, that $30.5bn number is the one that matters most for Berkshire.
Debt is pretty modest at $2.8bn; no particular need to reduce the leverage.

Jim

6 Likes
#25

"If he’s paying 1.3x book for Alleghany, wouldn’t he pay 1.5x book for his own “masterpiece”?

Gregg Warren - Morningstar

Berkshire Acquires Alleghany for $11.6 Billion; Expect to Increase FVE by 3%-5%
Analyst Note Greggory Warren, CFA, Sector Strategist, 21 Mar 2022

"We expect to increase our fair value estimate for Berkshire Hathaway by 3%-5% following news that the wide-moat firm has agreed to acquire the outstanding equity of Alleghany, a property/casualty insurer with reinsurance and specialty insurance lines, for $11.6 billion. While the deal seems pricey at first glance, with Berkshire offering $848.02 per share in cash for Alleghany–a 29% premium to Alleghany’s average stock price over the last 30 days (and a 16% premium to the firm’s 52-week high closing price)–the acquisition price works out to a multiple of 1.26 times Alleghany’s book value per share at the end of 2021. Berkshire has been buying back its own common stock for an average of 1.37 times prior quarter book value per share the past year, so a premium that lifts the deal price for Alleghany up to 1.26 times book seems reasonable to us from a price perspective.

More…

https://www.morningstar.com/stocks/xnys/brk.a/quote

1 Like
#26

The point being, this does not really solve Buffett’s problem of what to buy with Berkshire’s mountain of cash

WEB, Berkshire understands insurance, and also they have learned their lessons with Gen Re. But Gen Re player is part of this deal too, hmmm…

I think when Buffett did Gen Re (I have not looked into that deal much), my understanding is, he did with an explicit idea of gaining access to that float and also, given some of the issues he had or seen post-deal consumption, he may have decided to liquidate the derivatives book to set it up with an asset structure he is comfortable with. Let us hope that is not the same case here.

#27

And lets not overlook the value of the Wilbert Funeral Services for our shareholder base. Will be interesting to see how the non-insurance businesses are handled. Discretionary investments or to be retained.

1 Like
#28

lets not overlook the value of the Wilbert Funeral Services for our shareholder base

HA! how rude.

#29

I believe that Buffet kept the non core businesses from the WESCO acquisition.

#30

Interesting arithmetic quirk:
Consider two situations:
(1) 0.5% yield bonds with inflation at 1.5%, not far from what was the case recently. Seems like a real yield of -1%.
(2) 4.0% yield bonds with inflation at 4.5%, not wildly implausible for the near future. Seems like a real yield of -0.5%.

On the surface of things, option (2) looks better. Not good, but a higher real yield by half a percent. Great!

But in reality option (1) is better because of taxes.
Taxes are applied to nominal earnings, not real earnings.

Option (1) has a real after-tax yield of -1.11%, and option (2) has a real after tax yield of -1.34%.
Assuming a corporate tax rate of 21%.

Makes sense, nice insight.

I suppose even a 4% yield seems wildly ambitious, with the 5y treasury at only just over 2% now, and as low as 0.26% just 2 years ago. But in 1999-2000, when central banks still thought their role was to keep inflation around 2%, not protect share prices, we had rates of 5-6%, and rates never dropped below 8% between 1978 and 1986. And to your point about real interest rates, inflation was higher back then, but real interest rates were typically more like 4%, not hovering around 0. If we had 8% rates again, with 4% inflation, and 21% tax rates, Berkshire could get a 3% real return on its huge fixed income portfolio, and the return on $140b might well be $4b-$5b after tax, instead of close to zero right now.

But as you suggest, it would be much better to have only a small portion of that cash pile in bonds, even at an after tax return of 3%, and most of it in stocks with higher returns. If we do get interest rates of 8% again, they are likely to go along with much better prices on stocks, too, and of course more reasonably priced acquisition targets. It’s hard to hope for that outcome, but it’s nice to own shares of a company that would at least benefit from it.

dtb

3 Likes
#31

And lets not overlook the value of the Wilbert Funeral Services for our shareholder base.

:slight_smile:

Indeed. Many of us might soon join their already impressive client list:

Illustrious People Buried in Wilbert Vaults

Louis Armstrong, American jazzman
Pearl S. Buck, Nobel laureate author
Harry Caray, Chicago Cubs broadcaster
Richard J. Daley, Mayor of Chicago
Jimmy Dorsey, American band leader
President Dwight D. Eisenhower
Mamie Eisenhower
President Herbert Hoover
Vice President Hubert H. Humphrey
Conrad Hilton, businessman
President Lyndon B. Johnson
Joseph P. Kennedy, patriarch of the Kennedy family
Rose Kennedy, mother of President John Kennedy
President John F. Kennedy
Jacqueline Kennedy Onassis
Senator Robert F. Kennedy
Peter II , exiled king of Yugoslavia
Gregor Piatigorsky, famed cellist and teacher
Ezio Pinza, operatic singer
Elvis Presley, the “King of Rock 'n Roll”
Gilda Radner, comedienne
Betsy Ross, creator of the first American flag
Rosalind Russell, actress
Frank Sinatra, popular vocalist
Adlai E.Stevenson, U.S. ambassador to the U.N.
Miles Standish, early colonial military leader
John Wayne, actor
Harold Washington, Mayor of Chicago
Thornton Wilder, American playwright

5 Likes
#32

Illustrious People Buried in Wilbert Vaults

Miles Standish, early colonial military leader

Wow!! Wilbert has been burying celebrities for 366 years!!

Or maybe not: https://historicaldigression.com/2014/05/10/digging-up-myles… (the Captain was my great^10 grandfather)

1 Like
#33

Miles Standish, early colonial military leader

Art Buchwald used to write a fractured-French explanation of the Thanksgiving myth for his French readership. Miles Standish was translated as Kilometres Deboutish.

2 Likes
#34

Miles Standish, early colonial military leader
(the Captain was my great^10 grandfather)

I have a book here that says on Dec 6, 1652 the good captain fined my great-to-the-8th grandfather 5 shillings for missing jury duty. (gramps paid the fine).
In 1646 they were two of the 70 eligible European voters in the new world.

No idea what brand of casket grandpaw was buried in.

Jim

7 Likes
#35

Small world. My ancestor,Edward Doty, was on the same boat coming over as Myles Standish. Edward was involved in the first duel,June 4th,1621. He survived.

JK

1 Like
#36

the good captain fined my great-to-the-8th grandfather 5 shillings

What would that be worth today if invested at normal interest rates of the times?

1 Like
#37

Small world. My ancestor,Edward Doty, . . .

Maybe not so small when you consider how many descendants, they may have had in 11+ generations.
Edward Doty is also an ancestor of mine. Another neat ancestor is Mary Towne Eastey executed in Salem for witchcraft. She was 58 years old and had 11 children.

RAMc

3 Likes
#38

"Small world. My ancestor,Edward Doty, . . "

Oh yeah?

Well I’m a descendant of not one, but three Mayflower passengers:

-William Mullins
-Priscilla Mullins (William’s daughter)
-John Aden (Priscilla’s husband)

Also a descendant of Benjamin Church, first Surgeon General of the U.S. Army and ultimately a traitor:

https://en.wikipedia.org/wiki/Benjamin_Church_(physician) and

1 Like
#39

the good captain fined my great-to-the-8th grandfather 5 shillings

What would that be worth today if invested at normal interest rates of the times?

It would be worth nothing because, were it in a typical bank, it would all be lost during the debacle of 1919 to 1932 or thereabouts.

2 Likes
#40

"Also a descendant of Benjamin Church, first Surgeon General of the U.S. Army and ultimately a traitor:

https://en.wikipedia.org/wiki/Benjamin_Church_(physician) and"

Breck,

You should honour your relative as loyal to the Crown. He was not the traitor!

Cheers

#41

“Breck, You should honour your relative as loyal to the Crown. He was not the traitor!”

Stanley,

By the way you spelled “honor”, I suspect I know where your loyalty lies.:grin:

My loyalties are mixed. Mother was born and raised in northern France - have traced her ancestors there back to the 1300’s. My paternal grandfather’s dad immigrated to the U.S. from England (Midlands) in 1872. My paternal grandmother’s ancestors all date back to Plymouth Rock and the colonies - mostly immigrants from England.

Finally, I have a sister who has lived in London for 30+ years. When I told her about our ancestor the traitor/spy, she said “good for him”. She has obviously “gone to the dark side”.:grin:

There was a book written about my ancestor a few years back. It’s one of the lesser known stories of the “American Revolution”. I enjoyed it. Other students of early American history might find it interesting as well.

https://www.amazon.com/Dr-Benjamin-Church-Spy-Revolution/dp/…

Dr. Church was also a poet:

Fame

"Fame is at best but an inconstant Good:
Vain are ye boasted titles of our Blood.
We soonest lose, what we most highly prize And with our youth our short-lived Beauty dies.
A generous Ardor boils within my Breast, Eager of Action, Enemy to Rest.
This urges me to fight and fires my Mind,
To leave a memorable Name behind.

Jeffrey B. Walker. The Devil Undone: The Life and Poetry of Benjamin Church, 1734-1778 (New York: Arno Press, 1982), 172-173, 221, 224-225.

2 Likes