Berkshire after Buffett Would Still Have Leg Up

For decades,  Berkshire Hathaway (BRK.B) has been a wealth-creating machine for owners, and while we expect some eventual changes at the top, we still believe the conglomerate will do well by its shareholders for decades to come.

The key question surrounding Berkshire has been what will happen to the firm once longtime chairman Warren Buffett and his partner, Charlie Munger, either step aside or pass on. While we readily acknowledge that it is highly unlikely that whoever succeeds this duo will be able to replicate their success--in part because of Berkshire's massive size now--we still think the model that Buffett has built will give his eventual successor a leg up on the competition.

For example, on the operating side of the business, Berkshire is run in a decentralized fashion, which obviates the need for layers of management control and pushes responsibility down to the subsidiary level, where managers are empowered to make their own decisions. To us, this makes intuitive sense, given that these managers know the most about their respective businesses. As such, we expect the bulk of the responsibility for whoever eventually takes on the CEO role will be determining incentives for each business and monitoring succession planning at the subsidiary level.

On the investing side, while we admit it's unlikely that Buffett's eventual replacement will be able to outshine his results, we think the organization's patient culture and long-term time horizon will give this person a slight edge over peers on investing Berkshire's prodigious cash flow in equities or business acquisitions. Regarding the latter, we think Berkshire's model of "buying forever" creates an advantage vis-a-vis private-equity firms, as many entrepreneurs seek to find a home for their life's work and often offer a buyer like Berkshire an attractive entry price, helping to boost Berkshire's long-term returns.

For some time we had been aware of a dearth of investment opportunities for Berkshire, given the abundance of capital that had elevated asset prices. But now, with tight credit markets, we think Berkshire stands ready to deploy some of its large cash hoard into marketable securities or businesses in need of liquidity, which we suspect will allow Buffett to extract very favorable terms. We expect that Berkshire's investment returns will moderately increase over the next few years, which should help accelerate the conglomerate's continued wealth creation for owners.

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