Idiot-Proofing Berkshire Hathaway

I'd love to be able to reveal the next CEO of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) -- that would be quite a scoop -- but I can't. However, preparing for the post-Buffett Berkshire is more than simply selecting an operating CEO and a CIO (chief investment officer). I think the shift toward highly capital-intensive businesses that Buffett highlighted in his most recent shareholder letter is another part of that process. Let me explain.

They need lots of cash
Berkshire doesn't break out capital expenditures by subsidiary company, so I used some publicly traded peers to highlight the significant investments some of its more recently acquired companies require:

Source: Capital IQ, a division of Standard & Poor's.

Buffett has spent a lifetime building Berkshire Hathaway, "a sweeping canvas that is his masterpiece," in the words of his biographer, Alice Schroeder. While he takes a hands-off approach to the running of Berkshire's subsidiary companies, one of his critical roles is capital allocation -- deciding what to do with the enormous gobs of cash these companies generate (in the 12 months to Sept. 30, 2009, Berkshire free cash flow was $6.2 billion).

Idiot-proofing Berkshire Hathaway
Shifting toward capital-intensive businesses and accepting "decent returns" (Buffett's words) over outstanding ones is Buffett's solution to the problem of Berkshire's size -- quite simply, there are fewer external opportunities to reinvest Berkshire's cash that will make a difference to its bottom line (Microsoft (Nasdaq: MSFT) has the same problem). But I think Buffett's rationale may go further than that. Increasing Berkshire's internal cash requirements is a means of protecting his "masterpiece," by reducing the risk that his successor will make ill-considered investments with the cash.

Buffett once quipped: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." Embracing capital-intensive companies may be an effort to mitigate that risk within his own enterprise.

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