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Berkshire Hathaway 101: An Overview for Merger Arbitrage

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Berkshire Hathaway is a giant holding company

Berkshire Hathaway (BRK-B) is a holding company that owns interest in various businesses but focuses on insurance, both primary and re-insurance. Probably the most visible Berkshire insurance company is GEICO, but General Reinsurance Corporation (GRN), or Gen Re, is also a major player. Berkshire Hathaway also owns Burlington Northern-Santa Fe Railway (BNSF) and participates in the utility business through MidAmerican Energy Company (MDPWK). Arbitrageurs who traded in the late ’90s will remember these transactions.

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Berkshire Hathaway has almost no centralized functions, such as legal, marketing, human resources, et cetera. Neither is Berkshire Hathaway’s management involved in running the day-to-day activities of its individual businesses. Rather than buying poor performing companies and fixing them, the holding company’s strategy is to find well-run businesses, retain management, allocate capital to them, and let the experts run the companies as they see fit. In the case of the Precision Castparts (PCP) transaction, Berkshire Hathaway fully intends for PCP’s own CEO, Mark Donegan, to run the company for the next few decades. To put the company into perspective, consider that Berkshire Hathaway employs about 316,000 people in total, while the number of people who work at holding company’s headquarters itself is a mere 25.

Warren Buffett

Warren Buffett, the world-renowned investor and business magnate, put together Berkshire Hathaway using Ben Graham’s and David Dodd’s intrinsic value principles, along with margin-of-error considerations. An influence on generations of value investors, Buffett was most famous for buying a portfolio of stocks in the depths of the 1970s bear market, buying fast-growing companies like The Coca-Cola Company (KO) at a price-to-earnings, or PE, ratio of 7. Other notable investments include Proctor & Gamble (PG) and Gillette.

Other merger arbitrage resources

Other important merger spreads include the Freescale-NXP transaction. The merger of Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) is expected to close by the end of the year. For a primer on risk arbitrage investing, read Merger Arbitrage Must-Knows: A Key Guide for Investors.

Investors interested in trading in the industrials space should look at the S&P SPDR Industrials ETF (XLI).

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