Warren Buffett's Not Afraid of This; Why Are So Many Other Companies?
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Warren Buffett, who turns 83 years old in August and has been at the helm of Berkshire Hathaway (NYSE: BRK-B) for nearly five decades, isn't afraid of a little succession planning. While the company's board is keeping the identify of the successor a mystery for now, we know that there's a plan in place, which seems to be enough information to keep shareholders content. Besides, they're not in any hurry to see Buffett step down - shares of Berkshire Hathaway are up 25% year-to-date.
Things are even less transparent at other companies that could potentially face change-in-the-helm events in the foreseeable future, including private equity firm Kohlberg Kravis Roberts (NYSE: KKR). There, (co-Chief Executives Henry Kravis and George Roberts are both near 70 years of age), succession planning has been a topic of discussion for years. After all, whose going to fill the shoes of its historic co-founders?
Rumor has it that Alex Navab, who has been with the firm since 1993, (and who serves as the co-head of the North American private equity business), is reportedly a candidate for the job. According to reports, Navab suffered a health setback when he collapsed amid an irregular heartbeat, according to the New York Post. Navab is reportedly back at work, but the scare thrust its succession plan, or lack thereof, back into the spotlight.
Meanwhile, Kohlberg Kravis Roberts, with $75.5 billion in assets under management as of December 2012, suffered a setback of another kind in its most recent quarterly performance. Second quarter net income fell nearly 90% to $15.1 million, down from $146.3 million in the year-ago period. Economic income, which takes into account both realized and unrealized gains and losses from its holdings, fell a less-harsh 74% to $144 million. The problem? A meager 0.9% increase in the value of its private equity funds versus a 5.1% rise in last year's quarter.
There were no blockbuster deals this year, and that weighed heavily on results. But the company is sitting on billions in cash, and recently raised a combined $14 billion for a North American-focused buyout fund and an Asian fund. The problem is that with the U.S. stock market on a tear of late, and the major indices in record-setting territory, valuations are lofty and KKR can't swoop in and acquire as many assets at fire-sale prices. And private equity firms have been taking money off the table of late, cashing in on their own investments.
Shares of KKR recently set a new all-time high and a pullback in recent days may seem tempting. Normally, the uncertainty surrounding any succession plan wouldn't be reason enough to stay away. But at a time when asset management is in the spotlight and firms like Steven Cohen's SAC Capital being indicted on charges of insider trading, it becomes that much more relevant. Coupled with its portfolio performance, I would stay on the sidelines for now.
Meanwhile, it's a fluid situation over at Germany's manufacturing giant Siemens (ADR) (NYSE: SI), but one thing that's clear is that there's executive turnover. Chief executive Peter Loescher's fate was sealed days ago when the company issued a severe profit warning -- the second of its kind in 2013 -- sending shares lower by about 8%. Siemens warned that it would not meet its 2014 profit margin target of 12% or better. Loescher blamed weak market expectations, but competitor General Electric was not only able to beat earnings estimates, but also report a record backlog of equipment and services of $223 billion, making Loescher's argument harder to accept.
The board responded with a statement revealing that there would be a vote to decide on the president and CEO's (Loescher) early departure. Instead of going down with the ship, Loescher is reportedly trying to sink chairman of the board, Gerhard Cromme, too. A German newspaper reports that Loescher won't step down unless chairman Cromme goes with him.
Loescher had another four years on his contract, yet Reuters is reporting that a successor has already been chosen -- Siemens' chief finance officer Joe Kaeser. With that, I would stay away from Siemens if not for its lack of growth then for the contentious nature of the company.
Oracle of Omaha
As for Buffett's Berkshire Hathaway, you can't really argue with the Oracle of Omaha. The company operates in four major sectors -- insurance, regulated capital-intensive businesses, manufacturing/service/retailing and finance/financial products. Incidentally, one of Buffett's favorite holdings, insurance company Geico, is facing a management shuffle of its own. Tony Nicely, chief executive of Geico's auto insurance business, seems to be making way for his successor. Bill Roberts was recently promoted to president and chief operating officer at Geico, which suggests he is being groomed to eventually take over for Nicely, who according to Omaha.com is probably about 70 years old.
Berkshire had a net gain of $24.1 billion in 2012, and directed $1.3 billion toward buying back shares. But over the past four years, Berkshire has lagged the market in terms of the percentage increase in book value. Buffett says the firm performs best when the wind is in its face, and considering the record run for stocks in 2013, it could mean a fifth-straight year of under-performance, which would be a record.
But this year Berkshire has Heinz in its portfolio, which Buffett bought alongside a Brazilian investor. All told, Berkshire poured $12 billion into the deal. It's focused on increasing earnings with even more bolt-on acquisitions this year.
Incidentally, one of Buffett's many famous direct quotes is: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later one will." We'll have to wait and see what the verdict is for the changes at the helm at the aforementioned companies.
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