Buffett’s oracle

Warren Buffett’s annual letter to shareholders of Berkshire Hathaway is much awaited for their combination of investment wisecracks and wisdom. The 2017 edition of the letter is out and is pretty much what we have come to see over the years — investment gyan, a dig at how accounting never ever reflects the true value of a business, praise for the CEO’s of his businesses and a description of what shareholders can expect on the day of the annual general meeting.

However, in one portion of the latest newsletter, the Oracle of Omaha appears particularly resentful of a couple of mistakes he has committed. and devotes some attention on the latest must-do trend in the corporate world- share buybacks.

Buffett says that in the investment world, discussions about share repurchases often become heated but he is of the opinion that assessing the desirability of repurchases isn’t that complicated. For exiting shareholders, repurchases are always a plus. Though the day-to-day impact of these purchases is usually minuscule, it’s always better for a seller to have an additional buyer in the market.

For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value since the remaining shares experience an immediate gain in intrinsic value. The same math applies with corporations and their shareholders. He concludes that the question of whether a repurchase action is value-enhancing or value destroying for continuing shareholders is entirely purchase-price dependent. He finds it puzzling that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed.

In an acquisition, price would always factor into a buy-or-pass decision. He goes on to inform us of two occasions when repurchases should not take place, even if the company’s shares are under-priced. One is when a business needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. The second exception materialises when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchase.

Though the culture of rewarding shareholders differs a lot between India and the US, in view of the recent interest shown by software companies in India to take the buyback route, it would be interesting to debate if the above mantras apply? TCS offered a buy back at a reasonable premium of around 15 per cent to market price which appeared to have resulted in a win-win situation for both the company and the shareholder.

It also appears certain that TCS does not have any plans to make big-ticket acquisitions in the near future or that the acquisitions that they do make can be managed without upsetting any of their financial plans.

Buffett concludes his discussion on share repurchases by stating that the Board should realise that what is smart at one price is stupid at another. The jury is still out as to whether buybacks add value to the shareholder over a long period of time and it will probably remain so. It would probably be reasonable to conclude that the world over share repurchases are dictated by events other than price. Once the buyback is firmed up, like water, price will find its own level.

The writer is a chartered accountant

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