Warren Buffett is renowned as the world's greatest investor, and for good reason. He built his Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) conglomerate from almost nothing into a $350-billion company, making thousands of investors rich along with him.
And while investors praise Buffett for his stock-picking abilities and business acumen, they should study another of Buffett's skills that deserves more attention: his mastery at reducing tax bills for himself and his investors.
The Oracle of Omaha has artfully structured many of his deals to avoid hefty taxation, including the savvy deal in 2013 that allowed him to dump $1.3 billion in Phillips 66 without paying taxes. Let's take a look at some recent examples that showcase Buffett's keen deal-making.
The Duracell deal
Last November, Buffett gained control of Duracell from Procter & Gamble, exchanging his P&G stock for the battery brand. Buffett never bought stock in the Tide-maker, but acquired it in 2005 when Procter bought Gillette, the razor-maker in which he was a major shareholder. Buffett's Gillette stake translated into 100 million P&G shares, but he gradually winnowed it down to 52.4 million over the years, indicating he was never particularly bullish on the consumer goods giant.
With Procter & Gamble looking to unload non-core brands, the opportunity arose for Buffett to swap his P&G stock for the battery company, avoiding any capital gains he would have paid on the approximately $4 billion worth of stock he held. Ownership of Duracell also came with $1.8 billion in cash, and as a result, Buffett saved more than $900 million in taxes.
Swap with Graham Holdings
In March of last year, Buffett pulled off a similar deal to avoid paying capital gain taxes on Graham Holdings, or what had been the Washington Post Company prior to the sale of the flagship newspaper to Amazon CEO Jeff Bezos.
Originally buying them in the 70's, Buffett made more than a 100-fold profit on the shares, which were worth $1.09 billion, and agreed to swap them for a TV station in Miami, along with Berkshire stock that Graham had held and $328 million in cash. The deal was structured for Berkshire to avoid a tax bill of more than $350 million and included language that would terminate the agreement if it "did not qualify for non-recognition of gain or loss" to avoid taxes.
More Berkshire tricks
As we can learn from the two deals above, Buffett is a big fan of the so-called cash-rich split-off, where he swaps stock that Berkshire owns for a business asset and/or cash. But there are other more mundane ways that Buffett uses the tax code to his advantage.
For instance, Buffett's a big advocate of buy-and-hold investing, and his long-term investments carry billions of dollars of unrealized capital gains. Berkshire's balance sheet contains $57 billion in deferred long-term liability charges, much of which is deferred tax liabilities. Using deals such as the ones above helps shield Berkshire from those liabilities, and the stocks can appreciate more while the tax deferments are still held.
Berkshire also does not pay a dividend, which would mean its income to investors would be taxed twice. By not paying dividends, Berkshire avoids giving investors an immediate tax bill and uses that money to help grow the unrealized capital gains that sit in Berkshire's coffers.
Can Buffett's impressive streak continue?
As both a huge conglomerate and a major investor in several multinational companies, Berkshire Hathaway is in a unique position and Warren Buffett has used that to his advantage in arranging these "tax efficient" deals. Buffett's special status also gives Berkshire preferred positions in a number of investments, such as the recent merger between Tim Horton's and Burger King, where a $3 billion injection fetched Berkshire preferred stock with a 9% coupon rate.
Buffett has often used his cash hoard and reputation to get deals that others can't, and his skill at deal-making and tax avoidance is part of the reason why Berkshire has been such a consistent winner. In fact, Berkshire just won a victory over the IRS, after a judge ruled that NetJets, a Berkshire subsidiary, did not have to pay $500 million in unpaid taxes and other fees, as the IRS had claimed.
As Buffett has aged, some have questioned if his investing acumen is still there, but a quick study of his recent deals suggests that his knack for deal-making seems only to be getting better.