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Last updated: December 12, 2012 6:17 pm
Warren Buffett, the billionaire who controls Berkshire Hathaway, has signalled he is prepared to take more aggressive measures to address perceived undervaluation of his sprawling conglomerate.
Berkshire said on Wednesday it had spent $1.2bn buying back 9,200 shares from the estate of a long-term shareholder, and changed its criteria for future buybacks to give the 82-year-old investor more latitude to repurchase stock.
The move comes as Mr Buffett continues to search for his next large acquisition for a group that already controls more than 70 businesses selling everything from butterscotch to prefabricated homes.
Berkshire does not pay a dividend, so with a $48bn cash pile at the end of September the investor must find large companies to buy. Mr Buffett said this year that two potential $20bn deals fell through due to disagreements over price, and that he was “salivating” at the prospect of another big deal.
Mr Buffett can buy back Berkshire stock at his discretion, with two caveats: he must keep at least $20bn of cash on Berkshire’s balance sheet and only buy stock at a defined premium to the group’s estimated book value, raised on Wednesday from 10 to 20 per cent.
However, he may struggle to buy back large amounts of stock. When Berkshire announced its first ever buyback last year, a swift share price reaction meant he was only able to purchase $18m of stock, a teaspoonful of the group’s $222bn market value.
Analysts and investors said the announcement on Wednesday had put a floor under the share price at $134,000 per A share, where it was trading mid-morning in New York and already equal to 120 per cent of book value.
Berkshire paid $131,000 a share for the $1.2bn of shares it acquired.
Patrick Wolff of Grandmaster Capital, a Berkshire investor, said one of few areas where Mr Buffett had erred was using shares for acquisitions when it would have been better to use the group’s cash. “He has talked about this in the past, so it is possible he decided he was too stingy with his 110 per cent cut-off limit and should have bought his own shares more aggressively last year when he had the opportunity.”
Mr Buffett, who took over Berkshire in 1965 when it had a market value of $18m, has always said he is disinterested in the share price in the short term.
However in response to repeated questions about the share price at the group’s annual meeting in Omaha this year, he said he did want it to trade at “intrinsic value” in the long term.
Berkshire shares are up almost 17 per cent this year, ahead of the broader market.
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