Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
In 1978 the banking regulators told Warren that he will have to separate the Rockford Bank from the rest of his businesses by the end of 1980. They were tightening up on allowing banks to be part of a non-banking organisations.
He announced that the most likely solution would be to spin it off to Berkshire shareholders sometime in the second half of 1980.
In the meantime, Eugene Abegg and Peter Jeffery excelled themselves with a 2.3% return on assets ($5m), treble that of the typical banks.
The highest price is not always the best choice
In 1979 Warren investigated the possibility of selling 80% to 100% of the banks’ shares to an outside investor. He said,
“We will be most choosy about any purchaser, and our selection will not be based solely on price. The bank and its management have treated us exceptionally well and, if we have to sell, we want to be sure that they are treated equally as well.” (Letter to BH shareholders” 1979)
He still regarded a spin-off as a possibility if a fair price along with a “proper purchaser” cannot be found by early autumn.
He bitterly resented losing the Illinois bank from the Berkshire stable “ you should be aware that we do not expect to be able to fully, or even in very large part, replace the earning power represented by the bank from the proceeds of the sale of the bank. You simply can’t buy high quality businesses at the sort of price/earnings multiple likely to prevail on our bank sale.”
The separation
On the last day of 1980, 41,086 shares of Rockford Bancorp Inc. (which owns 97.7% of Illinois National Bank) were exchanged for a like number of shares of Berkshire Hathaway – i.e. the bank was valued as being worth roughly 4% of BH.
This method permitted all Berkshire shareholders, if they wanted, to maintain their proportional interest in the Bank as well as their proportional interest in Berkshire. (There was an exception to this – Warren himself – he was only allowed by the bank regulators 80% of his proportional share).
Alternatively, shareholders could end up with a disproportionate holding in the bank or in BH (if they sacrificed the other).
A tribute from Warren…..
…….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
