The Motley Fool Previous Page

Explaining Berkshire's Mysterious Buyback

Michael B. Lewis
December 12, 2012

Not since the $9 billion acquisition of oil additive company Lubrizol in March 2011 have Warren Buffett and Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) made an "elephant" purchase, and even that wasn't a very big elephant.

Wednesday marked another 10-digit purchase for Berkshire, which was preceded by a halt in trading. But this one wasn't quite the elephant investors were expecting. In a rare move for the investing luminary, the company bought back $1.2  billion worth of its class A shares -- the second buyback in company history, and much larger than the first buyback of $68  million. Let's take a look at what this means for Berkshire Hathaway and its investors.

That was odd
At 9:40 a.m. on Wednesday, Berkshire Hathaway trading was halted by the SEC pending a news announcement. Immediately, the move seemed odd given that the company probably could have made the announcement 15 minutes earlier before market opened and allowed enough time for investors to digest the information. It seemed the only reason to halt trading would be for a pretty major announcement, possibly related to Buffett's health, his position in the company, or maybe some gigantic acquisition that would rattle the foundation of the Earth.

After a small waiting period, it was announced that Berkshire had decided to buy a chunk of Class A shares of its own stock that were recently made available in an estate sale of a longtime shareholder.

Wait, that's what all of the fuss was about?

It was a very strange way of announcing a buyback, which has been on Buffett's radar for some time. The Berkshire chief had said multiple times that he would begin aggressively buying back stock if the stock traded at 1.1 times book or below. That's where Wednesday's move differs from the plan. Berkshire bought the shares for $131 ,000 per share, which represents a relatively chunky premium given that today's book value is around $112,000. Why would Buffett all of a sudden reverse course on his 1.1 times book rule? That seems very un-Buffett-y of him.

What does it mean?
An easy conclusion would be that Buffett is so confident in the future profit power of Berkshire (which we, of course, know to