DEALS & DEAL MAKERS
Updated December 12, 2012, 3:50 p.m. ET

Berkshire Buys Back $1.2 Billion in Stock

By ERIK HOLM

Warren Buffett's Berkshire Hathaway Inc. BRKB +2.35%bought $1.2 billion of its own shares from the estate of a "longtime shareholder" as it increased the price it is willing to pay to repurchase its stock.
With a tax increase on such transactions looming, Berkshire's board signed off on the repurchase of 9,200 of Berkshire's high-priced Class A shares for $131,000 apiece. Berkshire is now willing to pay as much as 20% over book value to buy back its stock, up from 10%, the company said in a statement Wednesday
Berkshire Hathaway bought back $1.21 billion in Class A shares from the estate of a longtime shareholder at a slight premium to Tuesday's close. David Benoit reports on Markets Hub. Photo: Reuters.
The moves are the latest indication that Mr. Buffett believes Berkshire shares to be deeply undervalued. And it suggests that Mr. Buffett, known for his savvy dealmaking, isn't finding enough places to put Berkshire capital that will deliver the same return he can get by buying back Berkshire's own stock.
Berkshire Class A shares jumped 2.5% to $134,104 in late-afternoon trading. The stock is up nearly 17% this year.
Companies buy their own stock to reduce the number of shares in circulation. Such repurchases—common for other public companies but nearly unheard of at Berkshire before last year—give investors who retain the stock a larger stake in the company by taking some shares off the market.
The repurchase disclosed by Berkshire Wednesday represents less than 1% of the company's outstanding shares.
Mr. Buffett has repeatedly criticized other chief executives for wasting money on share repurchases when the share price is too high, describing such moves as "overpaying departing shareholders at the expense of those who stay."
But he also has said buybacks can be beneficial when the price is right. He wrote in a letter to Berkshire investors early this year that he was willing to purchase Berkshire shares if they are selling at a "material discount to the company's intrinsic business value." Until now, that meant paying a premium of no more than 10% over book value per share, the level he set when Berkshire first authorized its buyback program in September 2011.
Berkshire's book value, a measure of the company's net worth, was $111,718 a share as of Sept. 30, meaning the maximum price it is authorized to pay under the new criteria is currently about $134,000.
Longtime shareholder Whitney Tilson of T2 Partners wrote to his investors in an email that the Wednesday's new authorization was "big news" because it "put a [new] floor on the stock." He said he purchased more shares "the moment I saw the news."

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Mr. Buffett has said Berkshire's intrinsic value—a confidential measure he calculates personally—is substantially greater than its book value, a widely used metric for valuing shares.
The Berkshire statement didn't name the shareholder whose estate sold the 9,200 shares. Mr. Buffett declined to comment on any details involving the seller or the holdings, or on how aggressive the company will be in buying back shares in the future.
Mr. Buffett has said in the past that some of the company's larger individual shareholders aren't known to the public, largely because they aren't bound by securities regulations that require them to report their positions. He has said that some of Berkshire's largest investors would make the Forbes list of richest people if their holdings were divulged.
The estate that sold the shares did so at a time when many investors are unloading some of their winning stocks to avoid an increase in the capital gains tax next year.
The estate will qualify for this year's top tax rate of 15% on long-term capital gains. Next year the top rate will be at least 18.8% for affluent Americans, because of a new 3.8% tax on net investment income. In addition, as part of the debate in Washington over taxes and spending, President Obama has called for a five-percentage-point increase in the 15% rate, so the top rate could be 23.8%.
The price Berkshire paid for the 9,200 Class A shares was less than 1% over the company's $130,831 closing price on Tuesday.
Until now, Berkshire hadn't spent much of its massive cash stockpile on buybacks. It bought about $67 million worth of shares over four days immediately following the announcement of the buyback authorization in 2011 "before the price advanced beyond our limit," Mr. Buffett said in this year's annual shareholder letter. The company, whose authorization from the board is open-ended, hadn't disclosed other share repurchases until Wednesday's transaction was announced.
The Omaha, Neb., company had $47.8 billion in cash as of Sept. 30.
When Mr. Buffett announced his repurchase intentions last year, the shares stood at $100,320. At the time, Mr. Buffett said he wouldn't buy back stock at any price if Berkshire's cash fell below $20 billion because he wanted to keep a cash cushion on hand to protect against unexpected expenditures.
Berkshire has about 1.65 million Class A "equivalent" shares outstanding, but some are actually the company's Class B shares. Class A's can be exchanged for 1,500 Class B shares each. The so-called "Baby B's" rose 2.5% to $89.43 in late-afternoon trading.

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