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Berkshire Hathaway Board Approves Plan to Repurchase Company Shares

Source: WSJ - Erik Holm, Mia Lamar

Posted on 26 Sep 2011

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The board of Berkshire Hathaway Inc. approved a plan to buy back the company's stock, an indication that Chairman Warren Buffett believes the stock is undervalued.

The authorization marks the first time since 2000 that Mr. Buffett has indicated Berkshire's large cash pile could best be used to buy back the company's own stock. Such repurchases, common for other companies but nearly unheard-of at Berkshire, give investors who retain the stock a greater share of the company by taking some of the shares off the market.

A buyback suggests Mr. Buffett, known for his deal-making savvy, hasn't found investments in recent months that would deliver the same return that he can get by buying back Berkshire's own stock. The company's cash hoard has grown by 71% in the 12 months ended June 30, to $47.9 billion.

Under the authorization, Mr. Buffett can use Berkshire's cash on hand to repurchase the company's Class A and Class B shares at prices no higher than a 10% premium over their book value, a measure of assets minus liabilities. The authorization doesn't obligate Berkshire to buy back stock.

In the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest," the company said in a statement Monday.

The move comes after Berkshire's Class A and B stock have fallen 17% this year through Friday, and its price relative to its book value is near its lowest level in decades. When Berkshire stock traded at similar levels in 2000, Mr. Buffett wrote in his annual letter to shareholders that Berkshire was willing to buy stock directly from shareholders, but the announcement alone was enough to send the stock soaring—and Berkshire never repurchased a share.

Berkshire's Class A shares rose around 5% to about $105,500 in morning trading after the Berkshire statement was released. The Class B shares rose 5.5% to around $70.

In 2000, Mr. Buffett wrote that he had erred at previous low points in the stock's trading history in not buying the stock.

"My appraisal of Berkshire's value was then too conservative or I was too enthused about some alternative use of funds," he told shareholders at the time. In the same letter, he praised companies that repurchased their shares well below book value in the 1970s and chastised those who had paid too much for their own stock more recently.

"Buying dollar bills for $1.10 is not good business," he wrote of companies that overpaid for their own stock.

Berkshire said in the statement Monday that repurchases won't be made if they would reduce Berkshire's cash pile below $20 billion. The purchases can be made in the open market or in private transactions, and the authorization can "continue indefinitely." The amount of the repurchases "will depend entirely upon the levels of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discount from management's estimate of intrinsic value."

Mr. Buffett, one of the world's richest people, has built Berkshire over four decades into a conglomerate with more than 70 units, including Dairy Queen, Fruit of the Loom and car insurer Geico Corp.

Second-quarter profit at Berkshire rose 74% to $3.42 billion on improved results in its derivatives portfolio and gains on an investment in Goldman Sachs Group Inc. Operating earnings, Mr. Buffett's preferred metric for evaluating his company, fell 12% to $2.7 billi