Cut in Alleghany Deal Price Shows How Warren Buffett Dislikes Investment Bankers
Warren Buffett reduced the price that
Berkshire Hathaway would pay for
Alleghany by nearly $2 a share, or $27 million, to account for the investment banking fee that Alleghany paid to
Goldman Sachs Group, its longtime banker.
Berkshire Hathaway (ticker: BRK. A and BRK. B) on Monday agreed to purchase Alleghany (Y), a diversified insurer, for $848.02 a share in cash, or $11.6 billion. The odd deal price immediately raised some eyebrows about how it was reached.
It turns out that a deal price of $850 a share was reduced by the “financial advisory fee” paid to Alleghany’s financial advisor, according to the merger document filed late Monday.
It states that Alleghany holders have “the right to receive $848.02 in cash, representing $850.00 per share less the financial advisory fee due to the financial advisor in connection with the merger.”
Bloomberg earlier reported the cut in the offer price. Berkshire Hathaway did not immediately respond to a request for comment.
Buffett thinks little of investment bankers, generally viewing them as high-price parasites. Berkshire doesn’t use them on its deals, including on Alleghany.
Charles Frischer, a private investor and holder of both Berkshire and Alleghany shares, says the banking disclosure reinforces his doubts that Alleghany got a good deal.
Berkshire is paying 1.26 times Alleghany’s year-end 2021 book value and a similar premium above Alleghany’s share price on Friday. The stock rose 24.8% Monday to $844.60, ending just shy of the deal price. On Tuesday, Berkshire stock was extending a recent rally, gaining 1.2%, to $531,140, while Alleghany was down 0.3%, at $842.
Alleghany has traded at 1.3 times book –roughly the price offered by Berkshire — only 1.6% of the time in the past 10 years. The other times it has traded at a discount to 1.3 times book.
While Alleghany has traded close to book value in recent years, it has an excellent insurance franchise and an increasingly profitable group of non-insurance businesses under the Alleghany Capital umbrella that could be worth $2 billion. Alleghany’s closest peer, insurer
Markel (MKL), trades for about 1.4 times book value. Barron’s wrote favorably on Alleghany last year, calling it a mini Berkshire.
“What was the pressure on the Alleghany board to do this deal?” Frischer tells Barron’s. “Were they waiting for Buffett to make an offer, and when he calls, they bow down? The status quo at Alleghany was pretty good.”
Alleghany did not immediately respond to a request for comment.
Frischer argues that if Alleghany was willing to accept a relatively low price, it should have gotten paid at least partly in Berkshire stock so that shareholders could avoid paying capital-gains taxes.
Buffett must have wanted it known that the deal price was cut because of the banking fee to have had that language included in the document.
In doing so, he has embarrassed Alleghany CEO Joe Brandon and the Kirby family, longtime shareholders in Alleghany. Merger deals have died for less.
“What was Alleghany supposed to do? Sell the company without representation?” Frischer asks. Alleghany could be sued by shareholders if it didn’t get an investment banker.
Alleghany also appears to have sold the company without soliciting other bids, which is unusual and dubious corporate governance.
Reflecting this, there is a 25-day “go-shop” period when Alleghany can solicit other offers and if it gets a better one, the company won’t owe Berkshire any breakup fee.
But it’s much harder to find a buyer in 25 days after a deal has been reached than to solicit bidders during a formal sales process. Go-shops normally don’t result in a topping bid. Buffett refuses to participate in corporate auctions and might not have made an offer for Alleghany if the company had held an auction.
“I think the world of Warren, but a 25-day go-shop period is barely enough time to put together a credible superior bid,” Frischer says. “Alleghany was public for 80 years, and it comes down to 25 days to find a higher bid.”
The deal with Berkshire appears to have come together quickly, given that Alleghany executives, including CEO Brandon, were buying stock in the open market earlier this month and presumably wouldn’t have done so knowing of a Berkshire bid.
Buffett is also embarrassing Goldman (GS) by effectively saying that its banking services are worthless. Frischer says this could motivate Goldman to redouble its efforts to find a higher offer for Alleghany. In addition to Markel, potential buyers could include
W.R. Berkley (WRB) and
Goldman declined to comment.
Chubb is an intriguing possibility because it has the size—a market value of about $90 billion—and a formidable CEO in Evan Greenberg who probably wouldn’t shrink from taking on Buffett.
Greenberg is the son of another formidable figure, Maurice “Hank” Greenberg, the former CEO of
American International Group. Hank Greenberg was the leading insurance executive in the world in his day and a rival of Buffett.
Evan Greenberg is acquisitive. As CEO of Ace, he engineered the $28 billion purchase of venerable Chubb in 2016 that created one of the world’s biggest insurers.
Alleghany has benefited from better conditions in the property and casualty insurance market and is expected to earn about $75 a share this year and $80 a share in 2023. Its book value could approach $725 a share at year end and $800 by the end of 2023 if were an independent company.
Berkshire is paying just 11 times projected 2022 earnings for Alleghany and only a small premium above potential year-end book value.
It’s telling that Berkshire holders think Buffett is getting a great deal, as Berkshire class A shares rose 2.3% Monday to $525,000 after hitting a record high in the session. Berkshire’s market value rose by more than what it is paying for Alleghany as investors like that Buffett is putting Berkshire’s $144 billion of cash to work in an attractive deal.
Alleghany’s book value may suffer a temporary hit this quarter due to the impact of higher rates on its bond portfolio, but that is being offset by higher yields on new investments.
“Berkshire is paying a peanuts premium, and Alleghany is treating this like a Champagne deal,” Frischer says.
Write to Andrew Bary at [email protected]