Berkshire Stock Split May Alter Investor Base

Every big deal leaves a mark of one sort or another on the buyer, even big and experienced buyers such as Warren Buffett's Berkshire Hathaway. In this case, Buffett, famous for his disdain of stock splits, was compelled to split Berkshire B shares 50 to 1 to use as a currency in Berkshire's $26 billion takeover of railroad Burlington Northern Santa Fe. Buffett called that deal, announced in November, "an all-in wager on the economic future of the United States."

The stock split will make Berkshire somewhat more democratic. Now, everyone can own a piece. The shares will trade at about $67, compared to a presplit price of $3,432. Berkshire A shares, which have never been split, trade at $103,083.

The split will make it easier for smaller Burlington shareholders to take all of their proceeds in Berkshire Hathaway stock, which will facilitate the sale.

The split also makes Berkshire Hathaway a stock for the masses of people, many of whom already follow the so-called Sage of Omaha, now ranked the second-richest man in the world. His fortune was cut to $40 billion after massive charitable donations.

The split also makes it likely that Berkshire will be added to a major index such as the Standard & Poor's 500. Its lower price makes it easier to buy and sell, which is a criteria for admission to the S&P 500, as Henry Blodgett noted on January 19.

The shift in investor base might help boost the price of Berkshire shares, which many analysts say is undervalued. "It is possible that the institutional shareholders who come into owning Berkshire via the Burlington Northern merger will be more apt to hold on to the stock because they will perceive it as having greater liquidity now. Further, Berkshire is pretty obviously undervalued to anyone who takes time to examine it, so there is more likelihood that institutional shareholders will be attracted to it," Gifford Combs, managing director with $1.1 billion hedge fund Dalton Investments in Los Angeles told Portfolio.com in an email. Dalton owns Berkshire's A and B shares.

"Additionally, there is the possibility that Berkshire will now be included in one or more of the major stock indices for the first time. Were that to happen, index funds would be forced to buy shares in Berkshire, and, all else being equal, one would expect the shares to increase modestly in price because of that," Combs said.

Further down the road, it will be interesting to watch the extent to which those new investors influence the way Berkshire puts their capital to use. "The new shareholders may well have slightly different priorities. Perhaps they will be more short-term oriented in their thinking. I would expect that this will have no effect on Buffett’s thinking or actions whatsoever," Combs said.