What would Warren do?

The eventual successor to Warren Buffett as CEO of Berkshire Hathaway (BRK-A) is going to get asked that question a great deal.  Unfortunately for him (or her) they will not be able to do many of the things that Buffett can.  This due in large part to the capital, both public and personal, Buffett has built up over his long career.

The amount of digital ink spilled over the Berkshire Hathaway acquisition of Burlington Northern (BNI) is breathtaking.  After you get past the details of the deal most analysts focused on the meaning behind the deal and the implications for the future of Berkshire Hathaway.

There is no shortage of motives assigned to Buffett’s motivations for the deal.  They include:  anxiety about sitting on cash, a general economic play, a bet on another stimulus, a bet on coal, a bet on a turn in the rail economy, a desire to make Berkshire easier to run for a successor, or a desire to be a member of the S&P 500.  Then again it might be as simple as the fact that Buffett thinks Burlington Northern is undervalued.

Whatever the motivation, the deal in question is going to play a big role in how Berkshire Hathaway is run going forward.  This deal certainly helps deplete the firm’s current cash hoard.  Therefore forcing the new CEO to make fewer (big) investment decisions.  But at the same time it exacerbates the conglomerate issue.

A problem for that CEO is whether Berkshire Hathaway can remain a conglomerate indefinitely. Wall Street hates conglomerates.  (The irony being that Buffett greatly helped the other big conglomerate GE (GE) last year with a $3 billion investment.)  A term exists, conglomerate discount, to measure the degree to which a diversified firm’s market value lags the sum-of-its-parts.  Therefore corporate focus has been an important them in corporate America for decades.  It just so happens somebody forgot to tell Warren Buffett.

Warren Buffett gets a pass on the conglomerate issue.  As he very well should.  The problem is that the new CEO will not have this same luxury.  The Buffett aura at Berkshire may persist for some time, but it will not be unlimited.

Tough decisions will have to be made in the future by a new CEO of Berkshire. That list now includes what to do with that huge railroad company we own.

No direct positions in any of the securities mentioned herein.