Our Breakdown on Berkshire

Jason Stipp: I am Jason Stipp from Morningstar. The 2011 Berkshire Hathaway shareholders meeting just wrapped up. I am here with Paul Larson, equity strategist and Morningstar StockInvestor editor; and Gregg Warren, he is an equity analyst covering Berkshire Hathaway.

They are going to talk about some of the highlights, some of the disappointments, and some of the surprises from the meeting.

Thanks for joining me, guys.

Paul Larson: Thanks for having us.

Gregg Warren: Thanks for having us.

Stipp: First of all, Paul, any highlights, anything stand out for you from the meeting that is really going to be one of that top-of-mind take-home messages.

Larson: Well, one of the things that I thought was salient is they said over and over again that they did not want to issue shares of Berkshire Hathaway to go out and do acquisitions, and I think this is sort of relevant given in the last week we've had two major deals where companies actually went ahead and issued shares--Johnson & Johnson, which is a Berkshire investment, buying Synthes. And then also Exelon going out and buying Constellation Energy. I thought that there is interesting contrast, given those deals, with the advice that Buffett and Munger have been giving.

Stipp: Gregg, Berkshire actually did use some shares in the Burlington Northern acquisition. What was some of the reasoning there, and what's some of the reasoning for not really wanting to do this as a rule?

Warren: The Burlington Northern deal, I think, was a little bit special. It was one of the first deals in a very long time where they actually used shares to do a deal, and it was more based on the fact that splitting the stock and issuing it the way they did was sort of more benefit to the smaller shareholders that were in Burlington Northern.

And then the tangential thing that's never really talked about, which could have been a possibility as well, is that the increase in liquidity on the Class B shares opened them up to being included in the S&P 500, and if you remember back at that time, February 2010, we had just gone through this massive crisis with the financial-services sector, and S&P was looking for high-quality financial services firms because so many companies had blown up over the preceding two years.

And then why they wouldn't be looking to use it now, is again Warren continues to believe the stock is undervalued. They've got at this point close to $40 billion in cash on the books. Even the Lubrizol deal they are probably going to have somewhere in the nature of $45 billion at the end of the year. So they don't necessarily need to use stock. They would much rather use cash as a currency.

Stipp: Paul, there was a lot of talk before this meeting that it was going to be contentious. There were a lot of issues that were in the news recently that was not going to maybe make this the love fest that it had been in years past.

What was your sense of the overall tone of the meeting? Did that come to pass?

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Larson: Well, the first couple of questions were definitely tough questions, and they spent a large amount of time right at the outset dealing with the David Sokol situation, but after that point, especially in the afternoon, it was basically back to the same old Berkshire meeting that we've seen, and there was plenty of love to go around, I would say.

Stipp: Gregg, what things were you hoping to hear that you didn't hear? What were some of the disappointments and things that maybe weren't addressed to the extent that you would have liked to have seen?

Warren: I was hoping that we'd see a continuation at least in the afternoon of some of these tougher questions about CEO succession planning. He spent an enormous amount of time talking about Ajit Jain and sort of how he trusts him and that Jain is way smarter than he is when it comes to at least the reinsurance business. But overall ... I would like to have heard more about, "what are you doing to sort of prepare the next guys? Do you still have three or four internal candidates that you're looking at?"

The harder question I don't think anybody was going to ask was, "would you consider bringing in somebody from the outside?" Now that said, they did talk for a period of time in the afternoon about how he would like to make sure that Howard, his son, is in the chairman role, and having that balance between somebody who is already wealthy and has a vested interest in the business versus somebody who is the CEO running the firm and making sure that that's in place.

Now I think the wildcard, we were talking about this earlier, is always going to be Bill Gates, because he has got a vested interest in the long-term health of Berkshire Hathaway just based on the fact that Buffett's contributing all of his wealth over time to his fund.

Stipp: Paul, there were some questions about acquisitions. Buffett reiterated that he likes low capital intensity, high return businesses, yet we saw Burlington Northern, which is a high capital intensity business. Does that almost admit that Berkshire is running out of great ideas of great businesses for acquisitions?

Larson: Well, he said that those types of businesses--the royalty businesses where you have a stream of cash flow, a very high margin with low capital intensity--those are the best, but there are other very good businesses or other merely good businesses around, and I think that frankly Buffett is setting Berkshire Hathaway up to be a much more stable entity that's not necessarily dependent on one or two people like it has been in the past, where you have these capital-intensive businesses that can soak up the capital and invest it at good but not great rates in the future, and again make it much more stable and much more difficult to break.

Stipp: Gregg, last question: There was one question from the audience about CEO pay for the new CEO, the incoming CEO. My question for you, though, is, the person that takes over Buffett's job, can they be paid enough? Who is going to take this job and what's it going to cost?

Warren: I think that's the biggest problem for whoever takes the job. You are following Warren Buffett. It's like following a star quarterback on a professional team that's retired. You're always going to be compared to them, and it's always going to be an uphill battle.

I think the point is they're going to have to make sure that he is paid appropriately and sort of set up the role as more of a caretaker as opposed to being somebody that is going to equal Warren, because again, the capital allocation decisions are going to be, I will say, more done on a team level. The investment management team is going to be handling a lot more of the investment aspects of it. And then as Paul said, if you've got some more capital intensive businesses in the portfolio like Burlington Northern and MidAmerican are at this point, you're ensuring that that capital is being put to work someplace. Now the returns may not be as great as Warren has generated in the past, but he has already told us that, going forward, the returns are not going to be what they were over the last 40 years.

Stipp: All right, guys, great insights. Thanks for your live meeting blog today, for being here on this video today, and thanks for all the insights on the Berkshire Hathaway meeting.

Larson: Glad to be here.

Stipp: For Morningstar, I am Jason Stipp. Please be sure to check out the rest of our Berkshire Hathaway Annual Meeting articles and video reports. Thanks for watching and have a great day.