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Warren Buffett fans are buzzing with one burning question after the legendary investor released his annual shareholder letter on Saturday: Who is Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) replacement?
The Board is "enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire," Buffett said in the letter, without identifying the person. "When a transfer of responsibility is required, it will be seamless, and Berkshire's prospects will remain bright."
Buffett noted there were two "superb" back-up candidates in place as well.
Even though Buffett didn't share the details with investors, this is the clearest signal he's given that a specific strategy has been outlined for a post-Buffett Berkshire.
"It's more of a commitment, clearly," Alice Schroeder, author of "The Snowball, Warren Buffett and the Business of Life," told The New York Times. "This is not the if-I-get-hit-by-a-bus plan. This is the succession plan."
Some of Buffett's big-name employees are already slated for other positions, leaving just a handful of big wigs left to take the CEO spot.
The Warren Buffett Replacement Candidates
The names tossed around as a possible Buffett CEO replacement include Ajit Jain, the head of the company's reinsurance operations; Tad Montross, chief of the insurance business General Re Corp.; Greg Abel, president and CEO of MidAmerican Energy Holdings; Tony Nicely, chief executive of Geico; and Matthew Rose at the railroad unit Burlington Northern Santa Fe (BNSF).
Buffett praised each of the men in his letter, with exceptional comments for Jain.
"His operation combines capacity, speed, decisiveness and, most importantly, brains in a manner that is unique in the insurance business," Mr. Buffett wrote. "[Vice Chairman Charles Munger] would gladly trade me for a second Ajit. Alas, there is none."
Jain graduated from Harvard Business School and has worked at Berkshire for more than 20 years.
Author Andy Kilpatrick, who wrote "Of Permanent Value: The Story of Warren Buffett," told USA Today that he thinks Jain is the leading candidate.
"The more I think about it, the more I think we have a successor," Kilpatrick said.
Buffett hinted last year he had four possible replacements for the CEO spot. Former executive David Sokol was thought to be one of the leaders – until he quit last March after questions arose about his actions violating insider trading regulations. Sokol bought shares of Lubrizol Corp. weeks before suggesting to Buffett that Berkshire acquire the company.
We don't know who exactly it is, but we do know who it's not: Todd Combs, Ted Weschler, and Buffett's son Howard Buffett.
The senior Buffett confirmed Combs and Weschler are in line to take over his investment duties.
"Each will be handling a few billion dollars in 2012, but they have they brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire," wrote Buffett.
Son Howard will serve as non-executive chairman.
As for naming replacement CEO names, it's too risky for Buffett to draw attention to the No. 1 choice – especially after the Sokol disaster.
Sharing the replacement's name "is going to increase the public scrutiny of that successor, and if the successor leaves or makes a mistake, that's some risk," Len Blum, managing partner at Westwood Capital, told American Public Media's "Marketplace" program.
Buffett made sure to tell investors he had no plans of exiting his beloved Berkshire Hathaway in the near future.
"Do not, however, infer from this discussion that Charlie and I are going anywhere," Buffett wrote. "We continue to be in excellent health, and we love what we do."
Berkshire Hathaway (NYSE: BRK.A, BRK.B) Performance
Buffett kept the succession details a secret, but satiated investors' appetites with a detailed performance review of Berkshire Hathaway.
Berkshire reported net income last year of $10.3 billion, a 21% drop from $13 billion a year earlier. Total revenue rose to $143.7 billion from $136.2 billion.
The company's book value, or net worth rose 4.6%, outpacing the Standard & Poor's 500 Index 2.1% return.
Insurance premiums earned rose to $32.1 billion from $30.7 billion while revenue from railroad, utilities and energy businesses was up to $30.8 billion from $26.4 billion.
Each of Berkshire's five largest non-insurance businesses – MidAmerican, Lubrizol, BNSF, Iscar Metals, and Marmon Group – posted record operating earnings, totaling more than $9 billion pre-tax in 2011. Buffett expects those segments to again break records in 2012, topping $10 billion.
Berkshire has a market capitalization of around $200 billion and ranks among the top 10 most valuable U.S. companies. Its largest holdings include 13% ownership stake in American Express Co. (NYSE: AXP), 8.8% in The Coca-Cola Co. (NYSE: KO), 7.6% in Wells Fargo Co. (NYSE: WFC), and 5.5% in International Business Machines Corp. (NYSE: IBM).
Buffett said Berkshire will see record spending in 2012, with the "overwhelming majority" of investments in the United States.
Buffett Admits Mistakes
While Buffett admitted his prediction that the U.S. housing market would be in better shape at this point was "dead wrong," he maintains it will rebound – but didn't give a date.
"Housing will come back – you can be sure of that… Every day we are creating more households than housing units," said Buffett. "People may postpone hitching up during uncertain times, but eventually hormones take over. And while "doubling up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure."
Buffett's five housing-related companies had pre-tax profits of $513 million last year, down from $1.8 billion in 2006.
Buffett also referred specifically to his investments in bond issues of natural-gas utility company Energy Future Holdings Corp.
"That was a mistake – a big mistake… However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman," wrote Buffett.
News and Related Story Links:
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- The New York Times:
In Letter, Buffett Says Successor at Berkshire Is Lined Up