Buffett battles his own fame as bargain hunter

With $100m a week to invest, Warren Buffett resorted to the law to close his latest deal, writes DAVID PLUMB

THE billionaire investor Warren Buffett, who runs Berkshire Hathaway Inc, is battling his own reputation as a bargain hunter as he seeks to deploy the $400 million a month the company’s insurance units produce.

With pressure on to keep the $111 billion company growing after four decades of 22% average annual returns, the 72-year-old chief executive officer had to overcome a four-month campaign by minority stockholders in Clayton Homes Inc to block his $1.7 billion purchase. Critics said the price was too low.

“By definition, Buffett only buys companies he thinks are undervalued,” said Judson Brooks, an analyst at Harris Associates LP, which manages $30 billion with a value-oriented philosophy similar to Buffett’s. Buffett probably steered Berkshire to a sixth straight quarter of profit growth. The Omaha, Nebraska-based company reported on Friday that second-quarter earnings rose 16% to $779.50 per A share, excluding realised investment gains and losses.

Along the way, Berkshire’s cash holdings have swelled. They totalled $19.5 billion at end of the first quarter.

“I have $100 million to invest each week,” Buffett told Clayton Homes’ founder James Clayton and a group of employees at the mobile home maker’s headquarters near Knoxville, Tennessee, after agreeing to buy the company.

The cash, accumulated as General Reinsurance Co, National Indemnity Co, Geico Corp and other Berkshire insurance businesses benefited from the highest property and casualty rates in almost a decade, is generating a 1% return. Berkshire, which also owns carpet-maker Shaw Industries Inc, Dairy Queen and dozens of other companies, has never paid a dividend.

Concern about Berkshire’s growth is one reason its stock trades at the same level as in 1998 when it had about a third fewer assets. The shares have slid 1% this year, compared with an 11% gain in the Standard & Poor’s 500 Index.

Also weighing on the shares is who will succeed Buffett, the world’s second-richest person after Microsoft Corp’s William Gates. He plans to remain until he is physically or mentally unable to run the company.

“What was once a premium paid for Buffett’s investment skills is now a discount for fear of something happening to him,” said Tom Russo, a money manager with Gardner Russo & Gardner, which manages about $1 billion.

Of that, he held $158 million of Berkshire shares as of March.

In the past two years, Buffett has taken two companies out of bankruptcy, Fruit of the Loom Ltd and Finova Group Inc. He also spent $2.8 billion to buy pipelines from cash-strapped energy traders Williams Cos and Dynegy Corp. This year, he tried, and subsequently dropped, a bid for bankrupt Burlington Industries Inc.

Clayton shareholders such as First Pacific Advisors, Third Avenue Management and Orbis Investment Management said Buffett’s interest in the company was proof that the stock was too cheap to sell. The Clayton family, which negotiated the takeover and held almost 30% of the stock, won approval over the objection of a majority of independent shareholders.

A Tennessee judge on Thursday blocked the deal’s closing while an appellate court hears arguments about the fairness of the shareholder vote.

James Clayton, aged 69, said he was drawn to Berkshire’s track record of fostering family-run business such as Shaw Industries and Pampered Chef. Kevin Clayton, James Clayton’s son and the company’s chief executive officer, will continue as CEO.

The Claytons also said Buffett’s AAA credit rating and buy-and-hold investment strategy would allow Clayton Homes to grow and stay in business for decades to come.