By William Patalon III
Money Morning/The Money Map Report
Sokol announced that he plans to step down as CEO of the MidAmerican Energy Holdings Co., Berkshire’s utility unit. He will remain on as chairman.
Berkshire watchers are examining this move with great interest. Just ask Frank Betz, a principal with the Warren, N.J.-based Carret/Zane Capital Management LLP, who has played bridge with Buffett.
“I’ve been saying for three years that David Sokol is the obvious successor for Berkshire, and I may be dead wrong,” Betz told Reuters in an interview. “To me, it’s a clarion call [since Sokol] has very successfully run MidAmerican. It frees him from the day-to-day responsibilities of running MidAmerican to do whatever else might be on his menu.”
Berkshire Watchers – Watch Carefully
According to a recent study, buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor’s 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.
Even with that one-month lag, an investor who mimicked the moves of this market master would eclipse the S&P 500 returns by 14.26%, the study concluded. [For more information, read the recent Money Morning investment research: “How Buying Like Warren Buffett Can Boost Your Portfolio Profits.” The report is free of charge].
When it comes to the game of “Who Will Succeed Buffett,” many investors right now have two specific candidates in mind – Sokol and Ajit Jain, a top Berkshire insurance executive.
Not that the 77-year-old Buffett has any plans to leave anytime soon – even though his net worth of $62 billion makes him the world’s richest person, according to Forbes magazine.
Even so, it’s key for any public company to have a succession plan in place, especially one with as remarkable a track record as Berkshire boasts. And Buffett himself has said that Berkshire has three internal candidates – including one who could step in immediately. Buffett says he would like any successor to be young enough to stay in the job for 15 years.
Howard Buffett, Warren Buffett’s son, would likely become chairman. Four other candidates are in the running to become Berkshire’s chief investment officer, or CIO.
Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner in Lancaster, PA, said it’s “too early” to draw any conclusions about what Sokol’s job change actually means.
“This is the first move affecting [someone on] the well-considered list of successors who is changing his day job,” Russo told Reuters.
Sokol told the Omaha World-Herald that ending his 17-year run as CEO of MidAmerican will free up time for him to work on acquisition deals. MidAmerican operates several utilities and natural gas pipeline companies, and runs HomeServices of America, the No. 2 independent U.S. real estate brokerage.
He said the change is unrelated to Berkshire's succession plans.
“When somebody’s ready, they should get the opportunity,” Sokol, 51, told the World-Herald. “My 100% allegiance is to Berkshire and MidAmerican. I’m not going anywhere.”
Gregory Abel, who is MidAmerican's president and runs its PacifiCorp utility, will replace Sokol as CEO sometime next month. Although MidAmerican is based in Des Moines, Iowa, Sokol works in Omaha, where Berkshire is headquartered. That gives him substantial “face time” with Buffett – no small consideration, management experts say.
A key reason that Sokol is considered a front-runner for Buffett’s seat is that many analysts regard MidAmerican as a “mini-Berkshire,” said Mohnish Pabrai, managing partner at Pabrai Investment Funds in Irvine, Calif. Pabrai models his portfolios on early Buffett partnerships.
Berkshire Hathaway operates as more like an “investment vehicle,” which buys investment securities and other companies – many of which are permitted to maintain much of their independence.
Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies. Berkshire has a market value of nearly $220 billion.
A recent Money Morning story detailed how Berkshire has recently taken an 8.6% stake in Kraft Foods Inc. (KFT), making it the foodmaker’s biggest shareholder. It also acquired a $76.1 million stake in GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.
But a company like Berkshire – with that many moving parts – can be difficult to run. So if MidAmerican already operates as a “mini-Berkshire” – and Sokol has demonstrated a talent for operating such a complex company – he might well be viewed as the leading successor candidate.
That perception probably boosts “the odds that [Sokol] is one of the three guys. He's the perfect age and has the diverse experience. Jain is probably right there, if it happens soon,” Pabrai said.
That’s because Jain was born in 1951, putting him close to the outer edge of an age range that would make him a viable candidate. On the other hand, Jain joined Berkshire in 1986, and both he and Buffett have said they talk to each other every single day.
Jerome Heppelmann, a portfolio manager with Liberty Ridge Capital in Berwyn, Pa., said Jain “has the expertise in Berkshire's core business, insurance, and his stewardship has been superb.”
Jain handles coverage for “mega-catastrophes” such as Hurricane Katrina. He also runs Berkshire Hathaway Reinsurance, which provides insurance for other insurers.
That’s put him in the catbird’s seat to oversee a major Berkshire corporate project. In the past three months, Jain has spearheaded Berkshire’s drive to build a bond insurer from scratch as existing rivals such as MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK) have stumbled badly.
It was viewed as one of the shrewdest deals that Buffett and Berkshire have cut in some time. Buffett offered to assume responsibility for $800 billion of municipal bonds guaranteed by MBIA and Ambac. However, Buffett only sought out the most-profitable – and safest – portions of the companies’ municipal guaranty business. The offer excludes subprime-related securities, and collateralized debt obligations (CDOs).
And some analysts were honest enough to say that Buffett had negotiated a great deal for his company.
“I really don’t think this does much for anyone but Warren Buffett, as the thought of an insurer ‘giving away’ its best business and only means of surviving this mess in return for the rest of its ‘junk in the trunk’ should leave them cold,” Kevin Giddis, a fixed-income analyst at Morgan Keegan & Co., told CNNMoney.com.
So it’s no surprise that Buffett thinks highly of Jain. Indeed, in his shareholder letter this year, Buffett said Jain “has built a truly great specialty reinsurance operation from scratch.” Last year, he called that business “amazing.” In 2006, he called Jain an “extraordinary manager,” and the year before he wrote: “Ajit's value to Berkshire is enormous.”
In each of his last three letters Buffett referred to Sokol and Abel as “terrific” managers, and in the previous two called both “brilliant” managers.
The Rest of the Pack
Investors have suggested top chief executive candidates for Berkshire also include:
- Joseph P. “Joe” Brandon of reinsurer General Re Corp.
- Tony Nicely of auto insurer Geico Corp.
- And Richard Santulli, of private airplane operator NetJets Inc.
But when it comes to their being considered as Buffett successors, all three of these executives face real drawbacks. Nicely and Santulli are in their mid-60s, which would seem to rule them out.
And Reuters reported that investors have also mentioned Brandon’s name less following a controversial reinsurance transaction that led last month to a federal jury convicting four former General Re executives on fraud and conspiracy charges. Brandon was not charged.
[For Money Morning’s latest investment research report on Buffett’s investment outlook, read: Now That Warren Buffett is Crazy About the Loonie, Here are Seven Ways to Profit From a Strong Canadian Dollar. The report is free of charge].
News and Related Story Links:
- Money Morning Investment Analysis:How Buying Like Warren Buffett Can Boost Your Portfolio Profits.
- Money Morning Special Investment Research Report: Now That Warren Buffett is Crazy About the Loonie, Here are Seven Ways to Profit From a Strong Canadian Dollar.
- Corporate Web Site:MidAmerican Energy Holdings Co.
- Reuters: Buffett succession plan at Berkshire gets a twist.
- Money Morning:Foreclosure Freeze and Warren Buffet’s Bond Proposition Cause Stocks to Soar.
- Money Morning News:Buffett Offers to Bail Out Bond Insurers, Markets Rally.
- Money Morning News:Warren Buffett’s Berkshire Hathaway Crafts Deals for Kraft Foods and GlaxoSmithKline.
- Money Morning Special Investing Report:Now That Warren Buffett is Crazy About the Loonie, Here are Seven Ways to Profit From a Strong Canadian Dollar.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.