Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Gregg Warren just finished asking his questions of Warren Buffett and Charlie Munger. I'm going to talk about some of the big topics that came up.
Gregg, thanks for joining me.
Gregg Warren: Thanks for having me.
Glaser: Let's talk about Berkshire culture that came up and a number of different questions today and lot of different facets. Did you learn anything new about how they think about culture during the meeting?
Warren: No, I think they've been pretty clear in the past about how they look at culture and quite honestly there was – there's an interesting book that came out this past fall of Guy Cunningham at Columbia put out a book on – specifically on Berkshire's culture and the different culture at the subsidiaries. We actually had a question sort of queued up that was looking at how they ensure longer term once Warren and Charlie aren't there that the culture of the acquired assets sort of bells with the rest of the firm.
I mean it is interesting to think about, because it is a completely decentralized organization, so you wouldn't think matter that much. But overall, they do have to have a sort of culture in place that has everybody sort of managing their business similarly, this willingness to push capital up to the corporate headquarters to be invested for the long-term. So, overall, it was a good set of questions.
Glaser: But you still feel comfortable or as comfortable as you do that the culture will continue after Warren and Charlie are no longer there?
Warren: Yeah, I think they've really sort of established a benchmark. I think anybody – any of the guys that are in sort of the line-up to take over Warren's job, once he leaves have been with the firm for long time. So they are really imbued with kind of the culture that Berkshire expects.
Glaser: There were couple of questions in the meetings geared towards what Berkshire will look in a crisis, be it a rail car accident or a weather event or just another financial crisis and there are some interesting comments from Warren and Charlie at how things like Dodd-Frank make the financial crisis somewhat – more difficult to deal with than it might have been in the past. What's your take on how Berkshire will be able to respond to crisis today versus how they did maybe even just a few years ago?
Warren: Well, I think they are in a financial crisis. They were sort of the bank of last resort. They really had an opportunity to step in there and offer capital to good companies that were having a difficult time getting access to capital. I mean, Warren did make a really valid point. The climate has changed significantly in Washington over the last six years to the point where if we had another crisis you probably wouldn't be able to get sort of a blank check to go out there and do whatever to save the economy. It's really a different era and I think that's a lot of the reason why the regulation – a lot of the regulations have been coming down the pike from the regulators to sort of ensure that they don't need to jump in some segments of the market if something does go wrong.
When we think about the insurance stuff, I mean, there were some questions about whether or not global warming over the long run is going to have an impact. It's sort of highlighted as a risk for a lot of other competitors. I mean, the thing is Berkshire is well, well overcapitalized on its insurance business so they can really withstand any big major event in any way. So, it's not as big of a thought. I mean, when they look at risk that they are willing to underwrite they are really looking at sort of whether or not they will be able to cover it if an event does happen. So, overall there's nothing new there.
Glaser: You asked a question about the Duracell acquisition, why they are buying the business that's maybe in terminal decline or not a terminal decline but it's clearly declining. Did their response give you any more insight into how they think about acquisitions?
Warren: In light of what happened, I mean, it was really a tax effective deal for both Berkshire and for Procter & Gamble. I mean, Berkshire had an extremely low cost basis on the Procter & Gamble shares that held, going back to the days in which it originally bought Gillette which is in the early 90s. For P&G they had the cost basis of when they bought Gillette on the assets. So, it worked out for both firms. And he even said this probably would not have happened if there weren't for the tax advantages that both firms were dealing with, with the exchange.
That said, he probably said if they were to do it, absent the deals, the price would have been significantly different because again it is a declining business, sure, Gillette throws off good cash flow, it sure has a great brand associated with it but over the long run, it is probably not as high of a growth of a business as maybe the pricing would imply.
Glaser: Finally, there was a bit of a hint that Berkshire would be open to potentially taking on debt, particularly at these rates if they saw enormous acquisition that they just needed more capital for. Do you think something that there really is the prospect of something like that is happening that they would try to ingest a deal that large?
Warren: I mean, if you look at where the cash balances are sitting right now they've got about $63 billion in total cash on the books. You strip out $20 billion for the insurance operations, you strip out probably another $5 billion for the operating cash, for the other businesses and that still leaves you with somewhere in the neighborhood of $40 billion in excess cash. I find it hard to think of something larger than that that they'd be willing to take on.
I still think they are looking for something in sort of the $5 billion to $30 billion range. They would probably more likely just like to do that with cash on hand.
That said, interest rates are extremely low levels. And if you can take on debt over 10, 15 years and be able to sort of push out the payment on that then you should do it. I mean, they really don't have a whole lot of debt on their books you know from a corporate level so they can, obviously, do it. They did some of that with the Burlington Northern deal, so I wouldn't be surprised.
Glaser: Gregg, thanks for joining me today.
Warren: Thanks for having me.
