Berkshire Hathaway Inc. (BRK.B): A Buffett History Lesson

On this day in economic and business history…

“A policy row caused by the infusion of outside money into Berkshire Hathaway Inc. (NYSE:BRK.B) rocked the 76-year-old textile company today and resulted in the resignation of two top officers.” This brief New York Times introduction to the events of May 10, 1965 was the first time the world got to know Warren Buffett, majority owner of Berkshire Hathaway. The 35-year-old Buffett had held a large stake in Berkshire Hathaway Inc. (NYSE:BRK.B) since 1962, and made a proclamation he would soon regret (and walk back) once becoming majority owner: “We’re going to continue to sell the same goods to the same customers.” The early Buffet-era Berkshire investors are undoubtedly very, very glad he didn’t keep that promise.

At the time, Berkshire Hathaway Inc. (NYSE:BRK.B) was headed for annualized revenue of $51.2 million, with an expected profit of roughly $3.4 million. Four and a half decades later, Berkshire was a behemoth with $136 billion in revenue and $13 billion in profit. On the day Buffett gained majority control, one of the now-legendary Berkshire Hathaway Inc. (NYSE:BRK.B) Class A shares (which was the only share class available at the time) could be had for $18. Those shares grew through 45 years of Buffett stewardship to become worth $117,290 — representing an annualized growth rate of 21.6%. Nine shares, worth just $162 in 1965, would have made you a millionaire. Compare that to the performance of the Dow Jones Industrial Average over those 45 years: the index closed at 931 points on May 10, 1965, and ended up at 10,785 points in 2010, for an annualized growth rate of just 5.6%.

Wasted youth
Excel Communications, founded in 1988, became the youngest company ever to join the New York Stock Exchange when it went public on May 10, 1996. The company, operating as a multilevel marketer reselling long-distance minutes from Frontier Communications Corp (NASDAQ:FTR), was priced at $15 per share but closed at $29.38, a near-double that earned the company a $3.2 billion market cap. In its previous fiscal year, Excel earned $507 million in revenue, but its reported $45 million profit was called into question by analysts who mistrusted the company’s deferment of many millions in expenses.

Excel became the youngest company to earn a billion dollars annual revenue that year, and was also considered the fourth-largest long-distance carrier by the end of 1996. But the flaws in its business model became too great to ignore as more Americans shifted their calling preferences to mobile phones. Profits plummeted, and after the turn of the century Bell Canada, a major shareholder, acquired full control. Excel became a Bell Canada subsidiary, but was quickly spun off as a new privately held company, only to have this new corporate parent file for bankruptcy in 2004. After emerging from bankruptcy, the former Excel was eventually acquired by another privately held telecom provider. It wasn’t the first or the fastest to go big and then go bust, but Excel’s story highlights the risks any investor takes in buying up shares based on a very brief history of meteoric growth.

Say goodbye to your retirement
United Air Lines gained a judge’s approval to end its pension plans on May 10, 2005. The airline, which had been operating under one of the longest bankruptcy proceedings in American history, thus earned another unwelcome corporate record: the largest pension default in business history. The ruling freed United from $3.2 billion in pension obligations over the subsequent five years, and burdened the Pension Benefit Guaranty Corporation (PBGC) — the federal agency charged with guaranteeing pensions — with the responsibility for paying over 130,000 employees in United’s stead. The New York Times reported on the sorry record:

Some retirees could see sharply lower pension payments as a result; others will see little change in benefits, depending on a variety of factors. Some retirees at US Airways Group, Inc. (NYSE:LCC), which has terminated its plans, have seen benefits drop by as much as 50%.

The airline, which has been in bankruptcy protection since December 2002, has been pushing to end its pensions since losing its bid for a federal loan package last year. But unions representing United’s employees fought the action, threatening to strike if the pensions were set aside.

Along with raising that prospect, the action has significant implications for the airline industry, which has lost more than $30 billion since 2000, and perhaps for other industries like automobiles, with similarly heavy legacy costs.

Analysts have predicted that if United won its case, there could be a domino effect as other airlines are forced to seek bankruptcy protection to bring their pension costs down to United’s levels. That move would probably swamp the pension agency, which was created in 1974.

The move did speed United’s exit from bankruptcy, which was completed later that year. Five years later, United merged with Continental to become United Continental Holdings Inc (NYSE:UAL), but this new company continues to face multibillion-dollar pension shortfalls. Don’t expect the PBGC to pick up the slack — the agency reported a funding deficit of $34 billion shortly after the United Continental Holdings Inc (NYSE:UAL) merger closed.

The article The Buffett Era Begins originally appeared on Fool.com and is written by Alex Planes.

Motley Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool recommends Berkshire Hathaway and NYSE Euronext. The Motley Fool owns shares of Berkshire Hathaway Inc. (NYSE:BRK.B).

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