Who would have thought that a small textile company would grow up to become one of the biggest holding companies in the world today? The growth of Berkshire Hathaway (BRK.B, Financial) (BRK.A, Financial) has been nothing short of a fairy tale. It has grown leaps and bounds under the guidance of its founder, chairman and CEO, Warren Buffett –Â one of the smartest investing minds in the world today. He is a true legend in himself and has contributed heavily to the stupendous growth of Berkshire Hathaway. However it is just not about Warren Buffett being at the helm of affairs that has worked in favor of the company. Let us look at few of the success secrets of Berkshire Hathaway in detail.
Subsidiaries treated as different entities
Would you find it reasonable to believe that one of the biggest companies in the world has just 24 employees at its headquarters? That’s how Berkshire Hathaway operates. Currently, the group (holding and subsidiaries) employ close to 330,000 people. However the top management of the company, including Warren Buffett, does not interfere in the business operations of the subsidiary companies. These subsidiaries are fully autonomous and operate in their own styles.
Warren Buffett invests in a company only when he is completely confident about the way that company is run and about the talent and skill force of the workforce employed there. The philosophy of Berkshire Hathaway under Buffett’s leadership has been to give complete liberty to the subsidiary company to run the business in its own unique style. This philosophy is the same irrespective of the type of acquisition that the company makes.
Diverse sources of earnings
One of the major factors that make Berkshire Hathaway so successful today is the whopping amount of earnings it makes year after year. Where do these earnings come from? It is not from one or two sources, but from a big gamut of sources. Since the company has stakes in almost all the sectors, earnings come from these businesses at a regular pace. For Q3 2014, Berkshire Hathaway’s revenues came in from different businesses like GEICO – 10.18%, General RE -3.06%, Reinsurance Group – 9.41%, Primary Group – 2.23%, Investments – 1.87%, Total insurance group – 26.75%, Burlington Northern Santa Fe – 11.5%, Finance & Financial products – 3.24%, manufacturing – 18.65%, McLane Company – 23.77%, Energy – 9.49% and other businesses – 6.83%. Even if one of these sectors fails, it is offset by gains from the other sectors.
Smart acquisitions
Most of the companies that Berkshire Hathaway has acquired have returned more than double the value of investments that were made in them. Here is a chart that depicts some of the major acquisitions of Berkshire, the cost at which they were acquired and their market value for 2013.
The long term gains that these companies bought to Berkshire were worth$61billion. These operating profits from the businesses it acquired, was one of the key contributors for the success of Berkshire Hathaway.
Talented and astute personnel at the right positions
Berkshire Hathaway does not depend on Warren Buffett’s performance alone and that is a huge plus for this organisation. Buffet hired two talented co-investment managers, Todd Combs and Ted Weschler, whose portfolios gave more returns than the investments held by Buffet himself. These managers are quite young and their performances over the last few years have exceeded the S&P 500 index as well. Having these bright and young minds at the right positions helps Berkshire Hathaway to maintain a strong foothold in the future as well. This means, even after Warren Buffett retires eventually, the company will not be deeply affected, except for a drop in share prices for a few days.
Dominance of insurance industry
Berkshire Hathaway stands to gain a lot from its holdings in the insurance segment. There are two forms of income from the segment – through underwriting and through premiums or float. The company uses this float amount to settle the claims. Also, until the time these claims are paid, the float amounts are invested in some other means to get profit out of it. For the year 2013, close to $77 billion worth of float was invested back in the business and it fetched close to $3.7 billion worth of income after tax. For the full year 2013, after- tax income that was earned this way contributed to 30% of Berkshire’s profits.
Conclusion
The values and operations module followed by Berkshire Hathaway offer good lessons for companies that are over dependant on their founder or on the performance of their CEO or Chairman. Diverse business segments, stability of earnings, talented personnel at the right positions, autonomous control to subsidiaries and lots of other factors have contributed heavily to Berkshire Hathaway’s success and made it the superpower that it is today.
