April 23, 2018

Breakingviews: There’s No I in Buffett

by Breakingviews.

Investing alongside Warren Buffett – as many do – doesn’t necessarily mean sharing in his successes. Consider the bid for drywall maker USG. German building-materials maker Knauf is keen to buy it, and Buffett’s Berkshire Hathaway has indicated he’s minded to sell its 31 percent stake, even backing Knauf in a campaign targeting USG’s board. It’s a rational decision on his part and fairly unhelpful for USG’s other investors.

Knauf has offered $5.9 billion for USG, whose Chief Executive Jennifer Scanlon is in the process of making the company more efficient. That price is fairly meager when measured against the company’s share price in recent weeks – at $42 a share, it’s less than 20 percent above the $35 or so at which it had traded just before Knauf’s interest was disclosed in late March. A recent investor might back USG’s claim that the company is being lowballed.

There’s not, though, much reason for Knauf to offer more. Its pitch includes a line that a takeover isn’t about short-term financial returns. Yet were executives able to cut costs equivalent to the industry rule-of-thumb of 5 percent of USG’s revenue, projected at $3.4 billion for this year, the resulting $185 million of annual savings would have a present value of around $1.3 billion. That is enough to increase the current offer by perhaps $2 a share.

Berkshire Hathaway has even offered to sell an option to Knauf to hand over its shares at the mooted offer price. And Buffett has backed Knauf’s call for USG shareholders to vote – largely symbolically – against four board members who are up for election in May.

All of this makes perfect sense from Buffett’s perspective. Some of his USG shares came below $12 a piece, and he initially acquired stock back in 2000. It’s rare for investors who follow the Sage of Omaha’s stock-picking to find themselves in a situation where his interests might differ from their own – in part because he tends not to engage with hostile bids. If the USG case encourages them to think for themselves, that may not be a bad thing.

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