Among the many interesting questions asked at Berkshire Hathaway's (NYSE:BRK-A)(NYSE:BRK-B) annual meeting was a perennial favorite of mine: What happens if someone tries to break up Berkshire, presumably after Warren Buffett and Charlie Munger are no longer with us?
I like it, because it's a thinker's question. What if I could own a little See's Candies, and some Geico but hold off on the utilities because of their lower-return profile? Maybe you'd choose to just own a little Precision Castparts, now that it's no longer publicly traded. Or you might prefer taking a stake in something smaller, like The Pampered Chef, for example.
It all sounds pretty interesting, but it's also highly unlikely. As Buffett and Munger opined at the meeting in Omaha, breaking up Berkshire would be very hard to do. It's so big that even its pieces would be hard for most buyers to digest, it has well-known capital allocation priorities (share repurchases) that would probably quell activists' anger, and it'd be a tough pitch to recommend breaking apart something the world's greatest investors put together.
But it may also just be impossible ...
Buffett and Munger may have been simply wasting their breath explaining why Berkshire will stay whole. Some very smart people believe that Berkshire has been constructed in such a way that it can never be taken apart.
This is a topic that occasionally fascinates me. That Buffett would cleverly structure his masterpiece so that it could never be ripped apart is about as amusing as the insurance industry can get. But there's a convincing case to be made that this is exactly what Buffett has spent the past 51 years doing.
Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life, once wrote that she thought Berkshire was explicitly designed to be glued together permanently. When asked about breaking it up, she wrote that "Warren has designed it so that Berkshire can't be broken up as far as I can tell," later highlighting National Indemnity's ownership of BNSF as an example of the company's structural complexity. She should be the one to know, given she had unprecedented access to Buffett and Berkshire while writing a biography on Buffett. Before that, she followed Berkshire as a sell-side analyst for years.
National Indemnity may be Berkshire's crown jewel. Though few may know its name, it is the insurance company that acts as a holding company for many of Berkshire's biggest investments.
At the end of last year, it held $161.8 billion of assets, which included wholly owned companies such as BNSF. The company is also the container for many of Berkshire's common stock investments, with common stock making up an unprecedented 58% of its investment assets, multiples the insurance industry average.
Don't take size as the only factor that stands in the way of National Indemnity's, and thus Berkshire's, dissection. Complexity is the other. Consider what it does. National Indemnity makes billion-dollar wagers on anything from weather-related catastrophes to the eventual losses from other insurers' asbestos claims. (Fun fact: Ajit Jain is technically an employee of National Indemnity.)
As Buffett has written, the key to these varied types of long-tail insurance is the financial stability of the insurer. Since losses are likely to come years and decades later, the insurance company's liabilities have to be carefully matched with assets. If you think about that a little bit, you might come to see that it's only natural that an insurer of this type would back billions of dollars in future liabilities with long-lived, low-return assets like, say, a railroad as big as BNSF.
You might also come to the conclusion that regulators and customers might think of an activist with a scalpel as being anything but a harbinger of financial stability for a complex reinsurer. And you might, like Schroeder, come to think of National Indemnity as the cog that holds Berkshire together, as well as a shield to keep activists at bay.
All this is to say that if you weren't satisfied with the handful of reasons Buffett and Munger believe Berkshire won't be broken up, you can take solace in knowing that at least one person who was very close to Buffett believes he's already done his best to make sure it can't be done.