By SERENA NG
Warren Buffett, in his annual letter to Berkshire Hathaway (BRKB) Inc.
The would-be successor wasn't named, but it is likely a person who works for the Omaha, Neb., company. The 81-year-old Mr. Buffett has run Berkshire Hathaway for nearly half a century, transforming it from a struggling textile maker into a conglomerate with interests in railroads, retail and insurance as well as a giant portfolio of publicly traded stocks.
Near the start of a 22-page letter accompanying his company's annual report, Mr. Buffett said the board is enthusiastic about "my successor as CEO" and described the person as an individual the board has had a lot of exposure to. He still has no plans to step down from his multiple roles as Berkshire's chairman, chief executive and chief investment officer. He said in the letter that he is in "excellent health" and isn't "going anywhere," and that readers shouldn't take the comments about the succession plan as a sign the next CEO will take over soon.
Still, the comments indicate the company has formally identified an individual to take Mr. Buffett's CEO job in the wake of last year's departure of David Sokol, who previously was widely regarded among shareholders and in the media as the top candidate to take over for Mr. Buffett.
Mr. Buffett has in the past spoken of multiple unnamed candidates who could become CEO and said there will be an individual ready to fill his shoes the day he leaves. Yet succession concerns have plagued the company, particularly after Mr. Sokol resigned last spring amid controversy over his purchases of stock in a company Berkshire later acquired. Since then, there has been speculation that the front-runner is Ajit Jain, who runs Berkshire's biggest reinsurance business, though it is unclear if Mr. Jain wants the job.
Even though Mr. Buffett didn't name his would-be successor, he was "extraordinarily definitive in addressing the succession plan" at the beginning of his letter, showing how he "recognizes the importance of this issue," said Glenn Tongue, a Berkshire shareholder and one of the managing partners of investment firm T2 Partners LLC.
"Other than telling you the name, he is saying the plan is now completely in place," Mr. Tongue added.
Berkshire shares have lagged behind the broader market over the past two years, and many investors have cited uncertainty over future leadership as a worry. The company has for decades been closely identified with Mr. Buffett, who makes decisions on large acquisitions of stocks or whole businesses that determine the company's performance over time.
Mr. Buffett has said that when he dies, his multiple roles will be divided among different people. In the past 18 months, he has hired two new investment managers, Todd Combs and Ted Weschler, who will eventually oversee all of Berkshire's investments, though they each will only get to invest several billion dollars this year a fraction of the company's $100 billion-plus portfolio. But the two "have the brains, judgment and character to manage our entire portfolio," Mr. Buffett said in the letter. Mr. Buffett's eldest son, Howard, is likely to become the company's nonexecutive chairman.
For the CEO job, Mr. Buffett said there are also two "backup candidates," also unnamed. He said Messrs. Combs and Weschler will help the future CEO in making acquisitions of businesses, indicating he expects Berkshire's future leaders to work closely together.
On Saturday, Berkshire Hathaway reported net income of $10.3 billion for 2011, down 21% from a year ago, as large insurance payouts for natural disasters dampened higher earnings from other Berkshire businesses including railroad operator Burlington Northern Santa Fe and chemicals maker Lubrizol, which was acquired last Sept. 16.
The company's book value, a measure of net worth, grew 4.6% to $99,860 per share, beating the Standard & Poor's 500 stock index's 2.1% return, including dividends. Mr. Buffett uses the rate of growth in Berkshire's book value as a performance yardstick for growth in his company's actual value, though he doesn't pin a number on the latter. It was the first time in three years that the company's book-value growth outperformed the index.
Mr. Buffett touted his company's major investments in 2011, which included its $5 billion investment in high-yielding Bank of America (BAC) Corp.
Mr. Buffett said he is still looking for large businesses to acquire, in order to increase Berkshire's operating earnings. "My task is clear, and I'm on the prowl," he wrote. The company had about $37 billion cash at the end of 2011, close to what it had a year ago. Mr. Buffett has previously said the company will hold at least $20 billion cash at all times.
He also drew attention to poor decisions he made, such as an ill-fated $2 billion purchase of junk bonds from a Texas power producer formerly known as TXU Corp., which went private in a giant leveraged buyout in 2007. The company, now known as Energy Future Holdings, has struggled amid a slump in prices of natural gas, and Berkshire has written down its investment by $1.4 billion. The purchase "was a mistake a big mistake," Mr. Buffett wrote, adding he miscalculated the risk when he bought the bonds.
Mr. Buffett said he was also wrong about his prediction of when a housing recovery would take hold. Last year, he said the recovery would probably begin "within a year or so," but he said on Saturday that he was "dead wrong." Berkshire's subsidiaries tied to the housing sector saw earnings stagnate last year.
He provided more details on Berkshire Hathaway's unprecedented share buyback program announced last September. The company has so far repurchased only $67 million in stock, and will buy more shares if it results in gains for shareholders. He noted, though, that "we have no interest in supporting the stock" and its purchases "will fade in particularly weak markets."
In a tacit acknowledgment of his view that the company appears to have been ignored by the stock market, Mr. Buffett said Berkshire's book value now "far understates" the company's intrinsic or true value. He sought to explain why many of the company's operating businesses are worth much more than their book value as they have grown substantially since Berkshire acquired them. Berkshire shares have of late been trading near 1.1 times book value, versus an average of 1.6 times book value over the past 20 years. The A shares closed at $120,000 apiece on Friday, up $1,000.
On the economy, Mr. Buffett sounded an optimistic note. "The banking industry is back on its feet," he wrote. He also said he remains bullish on the long-term prospects of stocks versus other investments such as bonds and gold.