Tuesday, January 05, 2010

Warren Buffett Investment Culture Clash!

Berkshire Hathaway (BRK.A; BRK.B) has a value investor’s dilemma. It holds some 138.3 million shares of Kraft. That’s approximately $3.9 Billion. (Roughly 10% of Kraft) Berkshire does not want Kraft (KFT) to overpay and dilute Kraft equity. Kraft to increase cash is selling a promising Pizza Division. Not exactly what a value stock is supposed to do. Berkshire Hathaway AKA Warren Buffett issued a statement indicating he does not support the possible issuance of some 370 million new shares of Kraft.

In a Value Investors mind equity is an extraordinarily valuable and some say sacred instrument. In a deal makers mind equity is a currency. Currency is to be circulated and exchanged. Hence you have an inherent conflict of core values. Cadbury (CBY) investors naturally favour cash for its currency value. If there is too much Kraft for sale the price will drop downwards and stay low for quite some time. Therefore they prefer cash. After all, their shares dividend yield just under 2%.

Warren Buffett has the stature to comment on the deal and give other Kraft investors pause for thought. He has given Kraft management some room to manoeuvre. With a 10% stake he is caught in the middle. Kraft is charged with creating shareholder wealth. The Kraft dividend yield is just over 4%. If they sell promising food divisions and dilute the stock the dividend will be at risk. When will Las Vegas bookmakers start posting odds on management survival?