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2 Reasons Buffett Should NOT Buy Markel

By Steve Symington - Apr 21, 2013 at 8:55PM

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A few days ago, I highlighted a few reasons why Berkshire Hathaway should acquire Markel. Now let's look at the other side of the coin.

Earlier this month, I outlined a few reasons Berkshire Hathaway (BRK.A 1.75%)(BRK.B 2.02%) CEO Warren Buffett might be compelled to spend some of his $15 billion war chest to acquire "mini-Berkshire" Markel (MKL 1.37%).

First, I noted Buffett looks for top-notch management in the companies he buys, which is something of which Markel certainly has no shortage.

What's more, Markel's insurance operations could not only complement Berkshire Hathaway's existing businesses, but could also provide new investment money for Buffett to put to work in the form of additional insurance float dollars.

Finally, Markel takes pride in its ability to grow by identifying and acquiring fantastic smaller businesses. As it so happens, Buffett is also fond of buying such businesses, especially considering Berkshire forked out $2.3 billion for small bolt-on acquisitions last year alone.

With that in mind, it certainly doesn't hurt to look at the other side of the coin.

So why wouldn't the Oracle of Omaha want to bring Markel into the Berkshire family of businesses? Here are two big reasons.

The path of most resistance
As fellow Fool Philip Durell so kindly pointed out, while it undoubtedly would be good for owners of Berkshire Hathaway stock over the long run if Buffett could manage to wrangle such a deal, it's a safe bet he would encounter plenty of resistance from Markel management and shareholders alike -- both of whom know all too well the significant long-term upside potential the company affords them.

As a Markel shareholder myself, I'd be lying if I said I wouldn't be upset if Buffett yanked the rug out from under me by swallowing one of my favorite long-term investments.

In fact, while it's no mystery I believe Berkshire Hathaway stock will continue to beat the market over the long run -- albeit at a slower pace than in years past -- Markel's comparatively small size is one big reason I made the conscious decision to own its shares over Berkshire Hathaway stock in my personal portfolio. Well, that and the fact owning shares of Markel gives me indirect exposure to Buffett's company, anyway: Remember, Berkshire Hathaway stock is far and away the largest holding in Markel's equity portfolio as managed by CIO Tom Gayner.

Bigger, cheaper game
When the rubber hits the road, the fact remains Markel isn't exactly the "cheapest" company on the market. While its current price to book value ratio of 1.26 is slightly lower than Berkshire's stock price to book at 1.33, Buffett himself has said he would only repurchase Berkshire Hathaway stock at a price under 1.2 times book value, so one would think a similar limit would apply in deciding to make an acquisition of another financial holding company like Markel.

In addition, given Markel's comparatively minuscule market capitalization of just $4.9 billion, Buffett may not want to reduce his options by spending a third of his available cash on a single company. After all, given Berkshire's market cap of more than $240 billion, it's going to take an elephant to move that earnings needle -- and Markel admittedly looks more a wildebeest than anything else.

Sit back, relax, and stay awhile
For the two reasons above, Markel investors can rest easy knowing their favorite stock probably isn't going anywhere for the time being. In the end, with literally hundreds of options on his table, it's anyone's best guess which company Buffett might buy next.

If one thing's for sure, though, it's that Buffett will bag another elephant as soon as he can.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$464,510.00 (1.75%) $8,010.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$310.20 (2.02%) $6.15
Markel Corporation Stock Quote
Markel Corporation
MKL
$1,351.34 (1.37%) $18.26

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