Berkshire Hathaway, Research Paper Example

Executive Summary

Berkshire Hathaway is one of the leading conglomerate enterprises in the world. Each year, this company makes billions of dollars in revenues from the acquisitions and mergers of large business units like the Geico Insurance Company. This large organization began in New England as a textile company but was eventually purchased by the entrepreneur Warren Buffet, one of the wealthiest people in the world. Since Buffet has taken over, Berkshire Hathaway has transformed into a billion dollar company that serves several business sectors including retail, insurance, and other services. However, looking at the analysis of the company’s background and the direction of where they could be heading, there is still more room for the company to grow, and acquire another companies that would help to further diversify their portfolio.

This proposal will provide a critical analysis of the company’s business metrics, as well as factors that have contributed both to the company successes and their failures. This proposal aims to show the reader how valuable larger companies can be when it comes to helping women and minority business owners. This is information will also help future investors and other companies by relaying information on how the company can distinguish itself and give back to the economy by helping to foster growth for minorities and women. With the information gathered from financial records, information given by the company and other valuable resources, this paper will provide a formal justification in recommending Berkshire Hathaway to implement a new program that aims at acquiring more diverse businesses.

Introduction

Berkshire Hathaway is a leading business enterprise that is considered a diverse conglomerate and which is globally known as a holding company. This company is highly successful and owned by the billionaire entrepreneur Warren Buffet. The company was formed in Massachusetts in 1889, as incorporated Berkshire Manufacturing Company. It changed into Berkshire Fine Spinning Associates, a textile manufacturing company, as it merged with other textile manufacturers in 1929.  The Great Depression was the primary cause for the company to do poorly until a partnership with investor Warren Buffet purchased a majority of stock in 1965 to control the company. Under his leadership, the company entered into the insurance industry by their first acquisition of the National Indemnity and National Fire and Marine Insurance Company in 1967. The acquisition was at a cost of $8.5 million. Three years later, the company moved to acquire even more companies such as the Buffalo Evening News, Cypress Insurance Company, and Sun Newspapers. The company has continued to make profitable acquisitions that have furthered the corporation’s success and the success of the acquired companies. Along with their strategic plans and the guidance of Warren Buffet, they have some of the highest shares that were sold in 2008 for a record $96,000, and continued to be the highest in the New York Stock Exchange.

What makes Berkshire Hathaway company so diverse is the variety of their acquisitions and mergers. These business units operate in a variety of business sectors. These businesses include General RE, Berkshire Hathaway, Geico, which are insurance companies; Mid-American, which regulates gas and electric utilities; Burlington Northern, which is a railroads; Clayton Homes, which manufacture housing and McLane, a wholesale distribution company. Other companies under his aegis are involved in manufacturing, specialty finance, retail and service (Locker &Tayan, 2010, p.2). Berkshire Hathaway has also had recent acquisitions of Dairy Queen, Helzberg Diamonds, Net Jets, half of Heinz, and Fruit of the Loom. Their principal revenue and operations are their businesses in insurance that provide worldwide insurance services. Their portfolio knows no boundaries as they own companies in fields such as aviation training, shoes, rug manufacturing, retail furniture, candy, news companies, and, recently have acquired Wrigley, the United States’ chewing gum company. The company has even partnered up with Mars Chocolate Company, which has helped in furthering their business activities and their portfolio. The company continues to make acquisitions that sets them apart from other conglomerates throughout the world. Their success is brought on by the Midas touch of Warren Buffet that can make the acquired companies a success and increase their bottom line.

Problem Statement

The problem, however, is that throughout Berkshire Hathaway’s portfolio, they do not have companies that are owned primarily by women or people of color. In fact, their portfolio boasts a majority of white males who have had their financial success through other major companies.  The number of companies that are growing in the business sector center around technology, but there is an increasing number of individuals who are underrepresented in the tech sector. Many of the small business owners that are trying to break into the “white men only” club include women and people of color. Since Warren Buffet is an influential figure and an advocate for equity – including advocating an increase in rich individual’s taxes and equal pay for women in the workplace — his company should implement a new program that focuses on acquiring tech companies from women and people of color. By doing so, it would create success for the acquired company and also further the success of Berkshire Hathaway.

Method Used

The method used in finding this information was examining financial documents from Berkshire Hathaway and also gathering information on the demographics of new companies that have entered the tech industry. A combination of sources were used, including quotations by Warren Buffet, future performance charts, and data analysis of past performances. All the sources wereessential in providing support for the intended program of acquiring companies that have more diverse heads of the company. The income statement as well as the balance sheets revealed the financial performance of Berkshire Hathaway and indicated the capability of the possible return on investment for the shareholders, as well as the functional activities. Evaluating Berkshire Hathaway’s portfolio shows that business units have helped to keep the conglomerate’s profits and revenues in the billions. There are several methods in research that have been conducted in order to provide support for the recommendation of a program that is intended to boost the number of successful women- and minority-owned companies that are making millions and have the potential to make Berkshire Hathaway billions.

Findings

Based on the information that was provided through secondary data and Internet resources, there are several key findings that can help to support the program for acquiring businesses that are minority- and women- owned. One of Berkshire Hathaway’s largest business endeavors is their insurance operation, which is being led by GEICO Insurance Company. Based on the company’s annual report, since obtaining control of GEICO’s majority share of their personal auto market in the early 90’s, it has grown from 2.5% to 9.7%. The company’s premium volume also increased to $16.7 million from $2.8 million, and is steadily increasing (Berkshire Hathaway, 2012, p.1). In the past five years, the company has earned over $10 million from their most profitable insurance companies that are not focused towards insurance. According to Larker and Tayan (2010), Berkshire Hathaway’s business model involves extreme centralization of their decisions for allocation of capital within their corporate headquarters and the extreme decentralization of their decisions on the operations of their separate business units. Looking at the performance of their stocks shows that from 1965 the company has been on an upward trajectory of share prices and returns, which has yielded Berkshire Hathaway a return average of 21.35%.

Based on these financial results, the company is valued at over $250 billion with a 9.13% profitability. Their revenue at the end of 2013 was over $170 billion, and their gross profit was over $135 billion. (Yahoo Finance, 2013, p. 1) Berkshire Hathaway has never split their initial shares from the start of the New York Stock Exchange, which is a reflection of its high annual performance. Looking at Berkshire Hathaway’s portfolio, it is made up of highly diverse stocks that indicate a low level of vitality or risk. The corporation continually reinvests all of the company’s earnings that are double taxed instead of giving the earnings back to the shareholders. Evaluating the Berkshire Hathaway’s business model, the paper has to look at the corporation in the sum of three parts, according to Motley Fool (2013):

• The corporation is a collection of insurance companies such as General Re and GEICO.
• Berkshire Hathaway has a vast investment portfolio which includes 8.6% of Coca-Cola and 12.7% of American Express stock.
• The corporation also has an impressive collection of businesses that they have acquired over the years, most of which provide services and good to the United States market.

The corporation had in the past forty years only two years where returns were negative, which can be accurately attributed to the 2001 and 2008 global economic crisis. However, apart from those two years, there has been nothing but steady high financial performance from the company. Their high returns can be contributed to their minimal amount of payments to their corporate management which is unlike practice in large corporations throughout the industry. Warren Buffet has substantial influence on the direction and success of the company, and has undoubtedly influenced the company’s high returns.  Looking at their information based on their Standards and Practices 500 (S&P 500, 2014, p. 1), the overall performance of the company is compared on a regular basis with other stocks and indexes that are used as standards in the company for measuring progress and accomplishments.  The S&P 500 is one of the widely regarded indicators of US equities and is a free- floating capitalization-weighted index of stock prices of the US’s foremost 500 companies. According to financial reports, in 2008 Berkshire Hathaway was the largest publically traded US Company that was included in the S&P 500, as their shares were considered too illiquid to be included (Yahoo Finance 2012).Throughout the years, compared to the S&P 500, Berkshire Hathaway has consistently outperformed the index.

Berkshire Hathaway’s performance from 1965 to 2009 show the company has an annually compounded gain of 20.3%, compared to a gain of only 9.3% on the S&P 500. Berkshire Hathaway also made an overall gain of 434, 057 % compared with 5,430% on the S&P 500. The graph indicates a sharp decrease in 2008, where S&P 500 and the company both show significantly low results for the time period. Berkshire’s future performance is based on their current Big Four investments which includes Coco-Cola, Wells Fargo, American Express, and IBM. Their ownership interest in each company has increased significantly, rising over 1% annually. (Berkshire Hathaway, 2012, p.1) The company is posed to bring in close to $200 billion by the end of 2015. With this future financial success indicated by analysts, the company has the ability to implement a new program that is aimed at providing opportunities for several smaller companies that are breaking into the industry.

Analysis

This analysis is based on the financial performance and the direction in which the CEO, Warren Buffet is taking the company.  Buffet has moved the direction of the company as the ninth largest company in the world. They are constantly improving their annual growth value to their shareholders to a whopping 19.7% for the past 48 years (Yahoo Finance, 2014, p. 1).

This company has steadily outperformed industry standards and has consistently acquired companies which have made the global conglomerate more profitable.  Along with their profitable acquisitions, they also have profitable investments in several large companies such as Wal-Mart, Wells Fargo, Munich re, Philips 66, Tesco PLC, U.S. Bancorp, Moody’s Corporation, The Proctor & Gamble Company, DIRECTV, Goldman Sachs, American Express CO, and several others. Berkshire Hathaway has made the acquired companies more successful as well. Looking at the information provided by Warren Buffet, the long-term economic goal of Berkshire Hathaway is to maximize their profits. While there is increasing number of minority- and women- owned businesses, they are still a small percentage compared to corporations in the larger business sectors such as insurance and technology. There are several large companies that have programs that can provide financial and mentor assistance to minority- and women- owned businesses that helps to accelerate growth. This has been reported in several media in which programs such as accelerators to help companies speed up growth. According to the Journal Sentential, “mentors at the accelerators act as advisers, meeting with company owners, helping them improve operations and build strategies. They also connect owners with big customers” (Rosenberg, 2014, p.1). This is just one of the many programs in which larger companies have played a part in helping minority- and women- owned businesses. Other programs have been implemented in law firms, service companies, and retail companies that help the surrounding communities as well. With this program, Berkshire Hathaway will not only provide opportunities for individuals that find it harder to get into the market but also increase the diversity of their portfolio and spread some goodwill within their company.

Conclusion

Based on the information provided on the exceptional performance of the ninth largest and one of the most successful companies in the world, it is recommended that the company implement a program that helps minority- and women- owned businesses. Just like other large corporations, they can act as mentors, accelerators and supporters in helping to break the mold of the largely white male- driven industry. With the increase in women and minorities owning and beginning businesses, this company can provide a helping hand while also helping to boost the economy.

References

“BerkshireHathawayInc” (2013). Bloomberg. Retrieved from http://www.bloomberg.com/quote/BRK%2FA:US/profile

“BerkshireHathawayInc.” (2013). YahooFinance. Retrieved from http://finance.yahoo.com/q/ks?s=BRK-A+Key+Statistics

“Berkshire Hathaway: Official Website”. (2014). Retrieved from http://www.berkshirehathaway.com/

Larker, D. &Tayan, B. (2010). “Berkshire Hathaway: TheRoleofTrustinGovernance.” StanfordUniversityGraduateSchoolofBusiness. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1678033

Luckett, T. (2011). “WhyBuyBerkshireHathaway?”TheMotleyFool. Retrieved from http://www.fool.com/investing/general/2011/01/04/why-buy-berkshire-hathaway.aspx

Rosenberg, J. (2014). “Mentor programs help minority businesses speed up growth. Journal Sentinel. Retrieved fromhttp://www.jsonline.com/business/mentor-programs-help-minority-businesses-speed-up-growth-b99249683z1-255928221.html#ixzz2zavFIEd8

“S&P 500” (2009). Investopedia. Retrieved from: http://www.investopedia.com/terms/s/sp500.asp