Berkshire Hathaway is where Warren Buffett, the world's third-richest man (behind Mexican billionaire Carlos Slim and Warren's good buddy Bill Gates), spreads his risk by investing in a variety of industries, from insurance and utilities to apparel and food, and building materials to jewelry and furniture retailers. Its core insurance subsidiaries include GEICO, National Indemnity, and reinsurance giant General Re. The company's other largest holdings include Marmon Group, McLane Company, MidAmerican Energy, and Shaw Industries. Known as the Oracle of Omaha, Buffett holds more than 20% of Berkshire Hathaway, which owns a majority of more than 70 firms in all and has stakes in more than a dozen others.
Berkshire Hathaway seeks out large companies with consistent earnings, easy-to-understand business models, and like-minded leadership. Most acquisitions are made with cash, and most firms retain their management after the transaction. Buffett and long-time business partner Charlie Munger attempt to run the company like a small business, albeit on a much larger scale. It operates as a collection of individual enterprises; Buffett and Munger largely keep their hands off of portfolio companies' day-to-day operations, but allocate capital and control risk.
The company's plain-vanilla investments include Acme Brick, Business Wire, Dairy Queen, Johns Manville, See's Candies, World Book, Ben Bridge Jeweler, Helzberg Diamonds, pilot training outfit FlightSafety International, footwear companies H.H. Brown and Justin, and apparel makers Fruit of the Loom, Russell and Garan.
Berkshire Hathaway also holds a significant portion of the ubiquitous Coca-Cola, which it plans to hold "forever." Stakes in companies such as American Express, Johnson & Johnson, Wal-Mart, and Wells Fargo help round out the company's holdings.
Berkshire Hathaway's five largest non-insurance holdings -- Burlington Northern Santa Fe (BNSF), Iscar, Lubrizol, Marmon, and MidAmerica Energy -- reported record operating earnings for 2011. The firm's core operations -- insurance and utitilies -- continue to perform well while its holdings related to homebuilding muddle through the economic downturn. Also during the year, Berkshire Hathaway's operating companies spent more than $8 billion on plants, property, and equipment, some $2 billion more than any previous year. Buffett wrote in his widely read letter to Berskhire Hathaway shareholders that he expects both earnings and expenditures to continue to grow.
In his 2011 letter to shareholders, Buffett said that "Our elephant gun has been reloaded, and my trigger finger is itchy." Hunting big game has become somewhat of a neccessity for Berkshire Hathaway to continue on its growth trajectory, but the company benefits from not being married to any particular industry as it seeks out its quarry.
The Oracle wasn't kidding about his itchy trigger finger. A couple of weeks after he wrote that sentence, Berkshire Hathaway found its target in specialty chemicals firm Lubrizol. The deal, which carried a $9 billion price tag, fits the company's acquisition criteria. Lubrizol is big, has an easy to understand business with consistent earnings, and comes with stable management in place.
Another elephant in Buffet's sights was International Business Machines (IBM). Berkshire Hathaway invested more than $10 billion in the company in 2011, after years of avoiding the technology industry. The investment represents about a 5% stake in IBM.
Not one to only hunt big game, Buffett sometimes goes after smaller prey. In 2011 Berkshire Hathaway bought Buffett's hometown newspaper company, Omaha World-Herald, from its employees and the Peter Kiewit Foundation. The company publishes a handful of daily and non-daily newspapers in addition to its flagship Omaha World-Herald. The deal kept the company in local hands, as well as imparted Buffett's faith in the value of the newspaper (which he named one of the best-run in the country). Berkshire Hathaway continued to invest in communities newspapers and in 2012 announced that it would acquire a group of 63 newspapers from Media General as well as another small daily newspaper in Texas.
Berkshire Hathaway has also been building its reinsurance holdings. The company paid some $1 billion for a 3% stake in Munich Re in 2010, and later upped its interest in the German company to 10%. It also acquired the life reinsurance business of Sun Life in late 2010. In 2011 National Indemnity, a unit of Berkshire Hathaway, offered $3.2 billion for reinsurer Transatlantic Holdings. The bid topped two other offers, but was rejected for being too low.
Berkshire Hathaway completed its acquisition of BNSF in 2010. It originally bought a 20% stake in the railroad operator for some $8 billion two years prior, and paid more than $26 billion in cash and stock for the remainder -- Buffet's largest buyout ever. The total outlay for the company was around $44 billion, including the assumption of $10 billion in debt. Berkshire Hathaway sold stakes in a handful of companies in order to help finance the deal. The most notable was the sale of nearly a quarter of its holding in Kraft Foods. Around the time of the sale, Buffet had sharply criticized Kraft for paying too much for Cadbury.
Berkshire Hathaway's attachment to safe-but-boring industries ensures the company maintains a relatively steady course. Under the guidance of the plainspoken Buffett, who pens his annual shareholder's letter in the first person and dubbed his company's annual meeting a "Woodstock for Capitalism," the firm proudly eschews get-rich-quick financial swashbuckling in favor of a measured, no-frills approach to growth. Buffett ignores the vicissitudes of the market to focus on long-term value creation, and Berkshire Hathaway is by far the most expensive stock in the US. It became a component of the S&P 100 and S&P 500 indices of the largest US companies in 2010, replacing BNSF after its takeover of that firm.
Although the company's performance -- or, rather, its leader's performance -- is always a hot topic, investors are becoming increasingly mindful of, and speculative about, his health and the future leadership of Berkshire Hathaway. Apparently, it will take several men to replace him. Buffett, who turned 80 in 2010, has acknowledged his mortality by announcing a successor: Berkshire Hathaway's next CEO will come from one of its portfolio companies, though Buffett did not reveal him, other than saying it will indeed be a man; the are also two backup plans. According to the primary plan, whenever Buffett steps down -- he has no plans to do so -- his son, Howard Buffett, will become chairman and the executive-to-be-named-later will be CEO. In a surprise move, he tapped obscure hedge fund manager Todd Combs to succeed him as chief investment officer. Candidates to be Berkshire Hathaway's next chief executive include the heads of GEICO, Berkshire Hathaway Reinsurance, and BNSF.
Long-time Berkshire Hathaway employee David Sokol, most recently the CEO of NetJets, had been considered a top candidate to replace Buffett by many observers but he took himself out of contention when he resigned in 2011. The departure came amid reports that he acquired shares of Lubrizol before it was acquired by Berkshire. Buffett initially said he did not believe the purchases were illegal nor were they a factor in Sokol's decision to leave the company. However, Berkshire Hathaway's board of directors later said Sokol violated insider trading rules and misled the company about his stake in Lubrizol.
In another succession-related move, Berkshire Hathaway acquired the 20% of Wesco Financial it didn't already own in 2011. A smaller version of Berkshire Hathaway, Wesco is an investment firm led by Munger, Buffet's longtime second-in-command. Berkshire has controlled Wesco for more than 30 years but, until now, never pursued a full takeover because of a promise Buffet made to its previous owners. The acquisition should streamline Berkshire Hathaway's operations, with the firm taking direct ownership of Wesco's holdings. – less