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Will Buffett’s legacy be a Berkshire breakup?

The most celebrated investor on the planet shows no signs that he is ready to pack in his remarkable career and devote himself full-time to contract bridge, one his few other passions. But Warren Buffett's famously devoted followers are beginning to raise serious questions about the direction of Berkshire Hathaway Inc. Not after the 83-year-old eventually retires, but right now, while he's still at the helm of his huge ocean liner of a company.

Mr. Buffett was well aware of the shareholder rumblings before he faced the usual throng of thousands Saturday in Omaha at one of the world's best attended and most heavily covered annual meetings.

In the past, these annual pilgrimages have been all about receiving the latest wisdom dispensed by the Oracle of Omaha and his long-time business partner Charlie Munger, 90. But the adoring faithful are increasingly raising legitimate questions about their $300-billion (U.S.) company's continuing ability to produce outsized returns, about Mr. Buffett's notorious aversion to returning capital to investors and whether it would make more sense to break up the huge company into its major constituent parts.

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Mr. Buffett acknowledges that Berkshire has become so big that its opportunities in equity markets are limited. So he's focusing on large takeovers in the $50-billion-plus range, even if it means raising debt or reducing its huge minority equity stakes in other companies.

"What really we want to do at our present size and scope, and with the objectives we've got for our shareholders, is we want to buy big businesses with good managements at reasonable prices and then try to build them over time," Mr. Buffett told shareholders.

That could spell terrific news for investors in, say, Canadian National Railway (current market cap about $48-billion) if Mr. Buffett were to choose that as his target. But it's not necessarily good news for Berkshire investors. Mr. Buffett has long insisted that his company needs to maintain a healthy cushion of about $20-billion to protect itself from various economic and other risks.

Keeping that $20-billion intact would leave just under $30-billion in cash on hand for acquisitions, based on numbers to the end of March. Which means taking on debt or selling assets (he has done the latter in the past) for one of his giant-size deals.

Investors would be better off if Mr. Buffett instead set aside his long-standing objections and liberated part of the company's $49-billion cash hoard to pay out dividends or buy back stock. Either move would immediately reward Berkshire shareholders.

Mr. Buffett should also weigh an even more radical turn: breaking the huge holding company into its major pieces, so investors could pick and choose what they want to own.

The Economist mused recently that Mr. Buffett should consider including such a dismantling in his succession plan. The reasoning: "[A] business built on its boss's knack of picking winners, his unquestioned authority within the company and his unrivaled reputation beyond it is unlikely to do anything like as well without him."

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But Mr. Buffett, who has never liked confrontational boards, could save his own company a long period of potentially vicious infighting among directors and division bosses if he takes that step himself.

As it is, there are no obvious synergies among such diverse holdings as BNSF Railway, GEICO insurance and Berkshire Hathaway Energy, beyond the undeniable value of Mr. Buffett's powerful name and access to its parent's capital.

Broken into separate major utility, transportation, financial services, manufacturing and retailing operations, each business could chart its own course – and would still be plenty big enough to attract capital.

The reality is that few conglomerates survive the brilliant, charismatic leaders who crafted them. Not even one created by the greatest value investor the world has ever seen.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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