Although Buffett, 94, made that move somewhat reluctantly, it has dramatically broadened the conglomerate’s ownership base and made him still more famous. At the same time, it has made Buffett’s market-beating returns accessible to investors who can’t afford the A shares, now trading at around $767,000.
The creation of the B shares also gave Berkshire a more usable currency for acquisitions. And the resulting dual-class structure has allowed Buffett to retain an unassailable 30% voting stake in the company even though he has cut his economic interest by more than half, to 14%, since 2006.
It started in 1996, when unit trust operators were taking Berkshire’s stock—the current Class A shares, then trading out of reach of many retail buyers at more than $30,000 each—and slicing them up for sale to individual investors. Those were the Charles Schwab Stock Slices, a current fractional-share product, of that era.
Buffett, Berkshire’s CEO, thought the fees on the trusts were too high, so he decided to issue a second class of Berkshire stock that would be equivalent to 1/30 of what are now the Class A shares. The company ended up selling 517,500 shares at $1,100 each, raising $565 million in a deal underwritten by Salomon Brothers that Buffett boasted carried a rock-bottom underwriting fee of 1.5%.
The B shares were later split 50-for-one. That means an original investor in 1996 has seen the stock rise about 23-fold to a current $512, from a split-adjusted price of $22. That works out to an 11.3% annualized return, compared with 9.7% for the S&P 500. Berkshire hasn’t paid a cent in dividend since then, so there are tax advantages as well.
At the time in 1996, Berkshire’s original stock had run up about 50% in the prior year. It was trading for a healthy price to book ratio of nearly two, compared with about 1.7 times today.
Buffett didn’t mind issuing stock at what then was a lofty level. “When we sold the Class B shares, we stated that Berkshire stock was not undervalued – and some people found that shocking,” Buffett wrote to Berkshire shareholders. “That reaction was not well-founded. Shock should have registered instead had we issued shares when our stock was undervalued.”
Buffett also made the offering open-ended. In other words, Berkshire didn’t cap the size of the deal, a tactic that deterred flippers looking for a quick buck.
At that time, Berkshire added about 40,000 shareholders to its family, compared with a total base of about three million now, a figure that could reflect multiple accounts of a single Berkshire shareholder.
Having the B shares, with their limited voting power, enabled Berkshire to offer stock as currency when it purchased Burlington Northern Santa Fe in 2010. It also helped pave the way for Berkshire’s inclusion in the S&P 500 that year; the super-high-priced, somewhat illiquid A shares would have been harder to add. Berkshire took BNSF’s place in the index.
It also has enabled Buffett to retain firm control of the company while giving away stock as charitable donations, as he has done since 2006. The B shares carry 1/1,500 of the economics of an A share but 1/10,000 of a vote. The Class A shares effectively carry close to seven times the voting power of the B shares.
Buffett stipulated that the A shares could be converted into B stock and not the other way around. Buffett, for instance, always converts his Class A stock to B shares when he donates them, effectively burning the A stock and their high vote.
The A shares now represent less than 40% of Berkshire’s shares outstanding and Buffett owns almost 40% of them. Buffett correctly anticipated that the B shares would ultimately predominate and become the more liquid of the two share classes. The B shares are the ones included in the S&P 500.
The dual-class structure will help Buffett’s three children, who will oversee a foundation holding Buffett’s stock after his death, retain influence as the stake is sold down to fund the foundation’s philanthropic efforts in the decade or more after his death.
The B shares may not be perfect corporate governance—it is generally considered to be fair to have two classes with equal economics and voting power—but they have proven a winning concept for Berkshire, Buffett, and shareholders.
Write to Andrew Bary at andrew.bary@barrons.com
