Today is Berkshire Hathaway’s (BRK.B) final trading session before the company’s inclusion in the Standard & Poor’s 500 Index. After the close of trading today, Berkshire’s Class B shares will join the index. The stock price may witness a significant increase later in the day as a result of buying by index funds tracking the S&P 500.
Yesterday, Berkshire Hathaway shares had moved up significantly. Late in January, Standard and Poor’s (S&P) announced that it will be adding Berkshire Hathaway replacing Burlington Northern Santa Fe Corp. (BNI) in its S&P 500 index. This move by S&P comes after Berkshire last week announced a 50-for-1 split of its Class B shares in connection with the conglomerate’s takeover of Burlington Northern.
For Berkshire, the acquisition of Burlington Northern, in which it had already owned 22.6%, will be its biggest to date. With this acquisition, Berkshire is adding a railroad transportation business to its already wide scope of manufacturing, retail, insurance and utility businesses. Valued at $34 billion, the acquisition is scheduled to officially close today.
Warren Buffett, the CEO of Berkshire Hathaway, has until now never considered splitting Berkshire stock. This reflects management’s desire to attract long-term investors as opposed to short-term speculators.
However, this share-split action is intended to compensate the small shareholders of Burlington Northern. Since the Class A shares (BRK.A) are too high priced, it would be difficult to use these to compensate the low-value shareholders in the acquired company. However, the split of the shares into the high-priced Class A and the lower-priced Class B will provide appropriate currencies for compensating both categories.
Thus shareholders who do not hold a high value of stock but opt for exchange may now be compensated with only Class B shares. The majority of the shares issued in the $100-per-share deal will, however, be Class A shares.
The share split-off and its eventual inclusion in the S&P 500 index will attract smaller investors to buy into the once prohibitively high-priced stock, boosting its demand and thereby increasing liquidity. On the negative side, it might also attract such investors that Buffett was apprehensive about.
The S&P 500 is a free-float capitalization-weighted index since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. It is composed of companies representative of the industries in the United States economy. Though Berkshire Hathaway had a market capitalization larger than a vast majority of members of the S&P 500, it had to date been excluded due to its over $100,000 per share price, rendering the stock “illiquid,” or difficult to trade.
Read the full analyst report on “BRK.B”
Read the full analyst report on “BNI”
Read the full analyst report on “BRK.A”
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