Warren Buffett has often said in interviews and annual letters to shareholders that Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) won't be a hostile acquirer. That is, it won't fight to buy a business its owners or management don't want to sell. But that policy apparently doesn't apply when Berkshire is acting as seller rather than a buyer.

As USG Corporation (NYSE:USG) drags its feet on an offer to sell the company for $42 per share, Berkshire intends to use its 30.8% ownership stake to motivate its top brass to make a deal. Berkshire told Bloomberg it intends to vote its shares against USG's board members who are up for re-election at this year's annual meeting, a clear message that Buffett is ready to cash in, even if USG's management and board are not.

A quick intro to the USG-Knauf debacle

In March, a company by the name of Gebr Knauf offered to acquire USG Corporation for $42 per share. According to Knauf, USG simply declined its offer "without engaging in meaningful discussions," which suggests that USG wasn't willing to make a deal at any price, let alone Knauf's proposed price.

Warren Buffett at an annual shareholders meeting.

Image source: The Motley Fool.

Rather than go back and forth with a seemingly unwilling seller, Knauf took its case to Berkshire and Buffett. Buffett offered to sell Berkshire's stake in USG to Knauf for at least $42 per share on the precondition that Knauf could convince USG's board, management, and other minority shareholders to agree to those terms. That served as a clear sign that Buffett sees Knuaf's $42-per-share proposal as more than fair.

With Buffett's implicit backing for a deal at $42 per share, Knauf then took its case to USG shareholders, issuing a letter calling on them to vote against its four board members up for re-election this year. Berkshire will apparently back Knauf by voting its shares against the USG's board members, too.

Buffett as an activist

With approximately 31% of the vote, Berkshire Hathaway is the most important voting block at USG's annual meeting. Its clout is only enhanced by the fact that Buffett is one of the world's most influential investors, as everything he does is closely followed by other market participants.

A review of SEC filings for the past three years suggests that USG Corporation's board members have always been approved by a wide margin, implying that Berkshire has historically voted its shares in favor of management and the board.

By voting against USG's board nominees this year, Berkshire and Knauf will all but seal the fate of the election at the May 10 meeting. Together, they own more than 41% of USG, and therefore control a proportionate amount of votes on matters put forth. They have de facto control over shareholder votes, since wrangling together other investors for a majority voting block should be easy for Buffett and Knauf to do.

Let's make a deal

Berkshire Hathaway seems to have the high-class problem of having too much cash and too few investment ideas, so if Buffett is willing to sell Berkshire's USG stake at $42 per share, it's a strong indication that he thinks that price is more than fair.

Announcing how Berkshire Hathaway will vote prior to USG's annual meeting also sends a very clear message to USG: Entertain deal talks with Knauf, or expect that the board will ultimately be picked off until it is made up of people who will. 

Frankly, I don't expect this to come down to a long proxy war or public campaign. My experience as an investor has taught me that public company board members are generally motivated by money, relationships, and most importantly, the fear of embarrassment. Publicly losing a board seat in an election fits in the "embarrassment" category.

Wall Street seems to believe a quick deal is highly likely. After word spread that Buffett would vote against USG's board members, shares settled at around $41, which implies that a deal to sell USG at $42 per share (or more) is almost certain to happen sooner rather than later.

 

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.