I thought today is the last day of the go-shop. Is it now a done deal?
https://www.alleghany.com/investor-relations/press-releases/…
“Alleghany did not receive any alternative acquisition proposals.”
Deal likely to close in the 4th quarter.
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“Alleghany did not receive any alternative acquisition proposals.”
Deal likely to close in the 4th quarter.
Good, and no big surprise.
Shares went from $677 pre-offer to about $845, the day after Berkshire’s $848.02 offer. They went as high as $860, four days later, indicating a modest hope of a higher offer, but that price has slowly deflated over the last few weeks, and last week came down from about $848 to $845, as that hope dwindled. And today the price has dropped down to $840, now that the go-shop period is officially over.
In other words, if the deal closes on time (some time during the fourth quarter), you could get about $8 (roughly a 1% return) in exchange for waiting about 6 months. And that $860 price (a 2.5% premium to today’s price) could have represented something like a 50% hope of a 5% better price.
I wonder if this deal may have been influenced by the fact that Alleghany is heavily invested in Treasury bonds, meaning they will likely be taking a pretty big hit as these bonds are repriced downwards. Berkshire won’t mind, because it is taking the long view, which is that much of these bond positions can be changed for stock positions, more in line with Berkshire’s insurance operations. But Alleghany could be acquired at a modest price, as the perspective of decreasing bond prices will have weighed on Alleghany’s share price in the last couple of years.
dtb
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I wonder if this deal may have been influenced by the fact that Alleghany is heavily invested in Treasury bonds
Unless they are held for sale, they don’t have to mark to market. They can carry at face value.
I wonder if this deal may have been influenced by the fact that Alleghany is heavily invested in Treasury bonds
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Unless they are held for sale, they don’t have to mark to market. They can carry at face value.
That is a good point, and insurance companies usually hold their bonds to expiry, so this wouldn’t be marked as a loss on the income statement. BUT the bonds have lost value nevertheless, whether they are held or traded, and in a 8% inflation world where you are holding a 2% 5-year bond, it’s not a good look.
dtb
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I recall WEB saying that Allegany would continue to operate as a stand alone organization as before. Might that mean that some negotiations with its regulators might be needed before changes in bond holding occur?
I don’t anticipate that being a problem, but it might take some time.
It would also seem that integrating Allegany into existing BRK operations would make sense - i.e. as an “add-on” to both insurance and the operating companies. But I suspect that will be delayed while Buffett is still around.
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Allegany would continue to operate as a stand alone organization as before. Might that mean
Even today Berkshire has so many operating subsidiaries to meet the regulatory requirements. I think the arrangement with Allegany has more to do with “autonomy, freedom” to the CEO, and probably the CEO may or may not report to Ajit Jain.
Separately, I don’t think there is any existing “BRK Operations”, I could be wrong, but the way I understand the HQ doesn’t operate any “corporate services” that the “operating businesses” can subscribe to, for ex: running payroll, or benefits etc.
Outside of cash, Buffett doesn’t want anything else from those “operating businesses”. He just wants cash and he wants it so badly, he doesn’t want to even share some of it with his fellow “partners” as dividend 
I recall WEB saying that Allegany would continue to operate as a stand alone organization as before. Might that mean that some negotiations with its regulators might be needed before changes in bond holding occur?
The most likely place for Alleghany to end up inside Berkshire is as a wholly owned subsidiary of National Indemnity. That is where much of the excess capital resides. Once Y is a wholly owned sub of National Indemnity, a simple intra-company reinsurance policy / guarantee is all it takes to overcapitalize the Y insurance subs and gain freedom to invest in fewer bonds. You do not, of course, need regulatory approval to lower the duration of your fixed income portfolio to such a short average that much of it ends up being classified as Cash equivalents. Just look at the duration of the Fairfax Financial “bond” portfolio.
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I recall WEB saying that Allegany would continue to operate as a stand alone organization as before. Might that mean that some negotiations with its regulators might be needed before changes in bond holding occur?
I think this independance would apply to the underwriting side but maybe not to the investing side. We’ll see, but examples abound: for instance, Buffett leaves the selling of peanut brittle to See’s, but they can’t just allocate capital as they see fit. Even GEICO probably has waits for Buffett’s ok before doubling their ad budget, don’t you think?
I could be wrong, but the way I understand the HQ doesn’t operate any “corporate services” that the “operating businesses” can subscribe to, for ex: running payroll, or benefits etc.
I think you’re right. The only thing I’ve heard mention is that Ted & Todd run some of the investments for for subsidiaries’ pensions. I think this is a major place Berkshire could offer something to its acquisitions. I hope that there is some cross- sharing of technology and methods among subsidiaries, but Berkshire is large enough where developing custom technology solutions for payroll would be cheap compared to subscribing to something like ADS payroll. It’s also large enough to really negotiate a good deal on healthcare.
He just wants cash and he wants it so badly, he doesn’t want to even share some of it with his fellow “partners” as dividend
Eh, buybacks are a superior way to return cash to shareholders as dividends force a taxable event on acquirers and retirees alike while offering no savings on tax rate.
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Berkshire is large enough where developing custom technology solutions for payroll
Payroll is pretty complex from tax point of view and things like failure to deduct alimony payments or others involve penalties, etc. It is difficult to keep track of all the tax changes in fed, state, country and local level is pretty daunting.
What I meant by “payroll services” is not developing technology, rather run COTS at the corporate level for the subsidiaries. Not only you can run payroll services, benefits, things like “workers comp” etc.
But remember this will require a HQ setup, and a team to manage/ integrate all the acquisitions (a la Cisco). I guess when Berkshire is acquiring a business, they are not factoring in synergies, scale of economics, cost takeout etc. Berkshire acquisition doesn’t require any of those to be viable. The benefits of not overpaying for the deals.
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