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Buffett says ‘sprawl’ is good, but may not be good enough

NEW YORK (Reuters) – Warren Buffett wants to buy more businesses to add to Berkshire Hathaway Inc’s “sprawl,” but cautioned it may not keep the company he has run for 50 years from evolving into something rarely used to describe it up until now: average.

In his annual letter to shareholders, Buffett on Saturday said Berkshire’s huge balance sheet gives him the power to funnel capital to some of the more than 80 operating units that deserve it, while its decentralized structure makes it the “home of choice” for many businesses looking to sell.

“Berkshire is now a sprawling conglomerate, constantly trying to sprawl further,” Buffett wrote. “In an operating sense, Berkshire is not a giant company, but rather a collection of large companies.”

That sprawl, including 9-1/2 businesses that would on their own make the Fortune 500 – Berkshire owns half of ketchup maker H.J. Heinz Co for instance – may limit its power to outperform.

Indeed, that power has been waning.

Berkshire’s book value per share, Buffett’s favored growth measure, has after taxes risen less than the Standard Poor’s 500 index including dividends, pre-tax, in five of the last six calendar years, after dwarfing the index in the prior 44 years.

Its stock price has also slightly lagged the index since the end of 2008, the company said.

“The bad news is that Berkshire’s long-term gains – measured by percentages, not by dollars – cannot be dramatic and will not come close to those achieved in the past 50 years,” Buffett wrote. “The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won’t be great.”


Buffett still wants Berkshire to make acquisitions in the $5 billion to $20 billion range. And purchases could be even bigger if he teams with partners, such as Brazil’s 3G Capital.

That firm bought the rest of Heinz and got $3 billion from Berkshire to help its Burger King unit buy Canadian donut chain Tim Hortons, creating Restaurant Brands International Inc.

Buffett said he expects to work with 3G on more activities.

He also questioned the wisdom of deferring too readily to investment bankers who advise what to buy and sell.

“Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 percent to 50 percent premiums over market price for publicly-held businesses,” he wrote.

“A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the earlier acquisition in order to ‘unlock shareholder value,'” he added.

Still, Berkshire is sitting on $63.27 billion of cash and its most recent purchases have been comparatively small.

They have included the AltaLink electric transmission unit in Canada, and Van Tuyl Automotive, the fifth-largest U.S. auto retailer. Berkshire also plans to acquire Procter Gamble Co’s Duracell battery unit later this year.

Once in Berkshire’s stable, those companies will likely stay.

Though Buffett does shed or give up some businesses – the textile company that gave Berkshire its name was closed in 1985 – Buffett said spinoffs “make no sense,” citing tax reasons and a belief that businesses are worth more within Omaha, Nebraska-based Berkshire than on their own.

Buffett said his eventual successor at Berkshire, whenever he or she takes the job – “gender should never decide” – will need to monitor those businesses closely, and as Berkshire grows larger fend off the “arrogance, bureaucracy and complacency” that can destroy seemingly indestructible companies.

“For very good reasons, business owners and operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind and permanent home,” Buffett wrote, italicizing “permanent” for emphasis.

(Additional reporting by Luciana Lopez; Editing by Jennifer Ablan and Raissa Kasolowsky)

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Herbalife cuts pay of CEO Johnson 36 percent after missed targets

BOSTON (Reuters) – Herbalife Ltd (HLF.N) cut the pay of Chief Executive Michael Johnson 36 percent for 2014 after the nutrition and weight loss company failed to meet performance goals set for him and other top executives, according to a securities filing on Friday.

Herbalife said Johnson, who is also chairman, received total compensation of $6.73 million last year, down from $10.5 million in 2013, mainly because he did not receive the incentive plan compensation of $3.7 million he got the prior year.

Herbalife has been closely watched since activist investor William Ackman accused the company of running a pyramid scheme in 2012, while rival investor Carl Icahn became the company’s biggest owner in 2013. Herbalife, being investigated by state and federal regulators, has denied Ackman’s charges.

Explaining its decision to not pay out incentive awards to Johnson and other top executives, Herbalife said target amounts for the applicable performance goals were not met, such as levels it set for earnings per share and sales growth in 2014.

Shares in Herbalife fell 11 percent on Friday after the company cut its earnings guidance for 2015 to reflect the stronger dollar.

(Reporting by Ross Kerber; Editing by David Holmes)

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Berkshire Hathaway net falls, operating profit rises

(Reuters) – Warren Buffett’s Berkshire Hathaway Inc on Saturday said fourth-quarter profit declined 17 percent as investment gains declined, but operating results improved.

Earnings fell short of analyst forecasts as profit declined from insurance underwriting, though results improved in Berkshire’s railroad and energy operations.

Net income fell to $4.16 billion, or $2,529 per Class A share, from $4.99 billion, or $3,035 per share, a year earlier.

Quarterly operating profit rose 5 percent to $3.96 billion, or $2,412 per share, from $3.78 billion, or $2,297 per share.

Analysts on average had forecast operating profit of $2,701 per share, according to Thomson Reuters I/B/E/S. Quarterly revenue rose 3 percent to $48.26 billion.

Book value per share, which Buffett considers a good measure of Berkshire’s worth, rose 8.3 percent from a year earlier to $146,186.

For all of 2014, profit rose 2 percent to $19.87 billion, or $12,092 per share, while operating profit rose 9 percent to $16.55 billion, or $10,071 per share.

Buffett, 84, has run Berkshire since 1965, transforming it from a failing textile company into a conglomerate with more than 80 operating businesses in such areas as insurance, railroads, energy, food and apparel, and real estate.

The Omaha, Nebraska-based company also has $117.5 billion of equity investments, roughly 59 percent of which is in just four stocks: American Express Co, Coca-Cola Co, IBM Corp and Wells Fargo Co.

Berkshire ended the year with $63.27 billion of cash, giving Buffett the ability to make one or more large acquisitions while still leaving a sufficient cushion.

(Reporting by Jonathan Stempel in New York; Editing by David Holmes)

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Warren Buffett says Berkshire has ‘right person’ as heir

NEW YORK (Reuters) – Warren Buffett told investors on Saturday that Berkshire Hathaway Inc (BRKa.N) had found his successor, giving more details than ever about the heir to the company he has run for 50 years.

“Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to assume the job the day after I die or step down,” the billionaire, 84, said in his annual letter to Berkshire shareholders.

“In certain important respects, this person will do a better job than I am doing,” Buffett added, as Berkshire Hathaway reported a 17 percent drop in fourth-quarter net income, coupled with an improvement in its operating results.

In previous annual letters, Buffett has said that Berkshire’s board had been fully aware of his chosen successor but he kept his options open for other possible candidates.

Investors have long speculated about who would, or could, succeed Buffett, particularly after he was diagnosed with and then beat prostate cancer in 2012.

Charlie Munger, Berkshire’s vice chairman, in a separate letter to shareholders characterized two top Berkshire executives, Greg Abel and Ajit Jain, as “proven performers who would probably be under-described as ‘world-class.'”

Abel, 52, leads Berkshire Hathaway Energy, and Jain, 63, has been Buffett’s top insurance deputy for three decades.

Munger is 91.

Neither Buffett’s nor Munger’s letter referred by name to Matthew Rose, executive chairman of the BNSF railroad unit, who has also been mentioned by investors as a possible successor.

In Saturday’s letter, Buffett strongly suggested that the potential successor already works within Berkshire.

Buffett has run Berkshire since 1965, transforming it from a failing textile company into a conglomerate with a $363 billion market value, and more than 80 operating businesses in such areas as insurance, railroads, energy, food and apparel.

The Omaha, Nebraska-based company also has well over $100 billion of common stock investments.

“Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board has grown to know well,” he wrote.

Age will also be a factor and Buffett said Berkshire may be best off if his successor stays on for at least a decade.

“Our directors also believe that an incoming CEO should be relatively young, so that he or she can have a long run in the job,” Buffett wrote. “It’s hard to teach a new dog old tricks. And they are not likely to retire at 65 either – or have you noticed?”

(Editing by David Holmes and Jennifer Ablan)

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BP ex-chief Browne to run Russian oligarchs’ oil venture: FT

LONDON (Reuters) – John Browne, the former chief executive of BP , will take charge of a $10 billion oil and gas venture backed by Russian billionaire Mikhail Fridman to help it expand internationally through partnerships and acquisitions, the Financial Times reported. 

Browne told the newspaper he will be appointed executive chairman of L1 Energy on Monday, giving up his jobs at private equity firm Riverstone and UK gas explorer Cuadrilla.

The appointment comes as L1 Energy, backed by investment funds owned by Fridman and his partner German Khan, prepares to complete as early as next week a 5 billion euro ($5.60 billion) deal to buy RWE Dea [RWEDE.UL], the oil and gas arm of German utility RWE.

The acquisition is a rare development since Russian firms have struggled to expand abroad over the past year due to US and European Union sanctions imposed on the country for its actions in Ukraine. 

Fridman and Khan plan to turn L1 Energy into a global oil and gas player, using $14 billion in proceeds from the 2013 sale of their stake in Russian oil producer TNK-BP [TNKBP.UL] to state-owned Rosneft. 

Browne led BP from 1995 to 2007 and was one of the architects of TNK-BP, Russia’s third largest oil producer at the time, in which BP owned 50 percent. 

Before agreeing to form TNK-BP, Browne and the oligarchs a endured a rocky relationship for several years because BP had effectively accused the Russians of stealing its assets.

L1 Energy will be capitalized with $10 billion of equity from LetterOne and also be funded by debt. The intention, said Browne, was “to build great partnerships” and “create something with lasting value” using Dea, which owns UK North Sea assets, as a platform.

“The first thing we will do is look in Dea’s areas of expertise to see where we can expand in those areas,” Browne told the FT.

“Secondly, we will look at the whole of North America to see what can be done and with whom we can partner there. Then we will look around the rest of world.”

The FT did not say how much Browne would be paid. His role at L1 could help overcome certain complications in the UK. L1 has been seeking a letter of comfort from the government to make sure its newly acquired assets in the North Sea are not seized if additional sanctions are imposed on Russia. 

(Reporting by Dmitry Zhdannikov, editing by Louise Heavens)

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HSBC not the troublemaker made out to be, rival Swiss banker says

ZURICH (Reuters) – HSBC (HSBA.L), in the spotlight after details emerged about how its Swiss unit allegedly helped clients dodge taxes, isn’t the troublemaker it is currently depicted as, the head of a rival private bank was quoted saying on Saturday.

“HSBC has been described as the troublemaker in class, and it is not,” Carlos Esteve, founder and CEO of Geneva-based Heritage, said in an interview with Swiss daily Le Temps. “HSBC was among the first to take steps to regularize its clients. Other institutions have been far slower.”

The comments are noteworthy because the unspoken rule among Swiss private bankers is to avoid directly commenting on rivals, a rare exception being three years ago when UBS (UBSG.VX) head Sergio Ermotti suggested Zurich’s main banking thoroughfare, Bahnhofstrasse, was full of banks which took untaxed money, as did UBS.

Ermotti was criticized by other bankers at the time for speaking out.

Founded in 1986, Banque Heritage is part of a program brokered by the Swiss government for Swiss banks to come clean on their untaxed American clients, paying fines and cooperating with authorities in order to avoid prosecution.

Esteve said Heritage hoped to conclude the program by mid-year, but didn’t say how much the bank expected to pay.

With roughly 6 billion Swiss francs ($6.3 billion) in assets, Heritage is one of a host of small private banks fighting to survive. Some experts predict the sector will shrink by about a third in coming years, squeezed by the regulatory clampdown and more recently by the strong Swiss franc.

But Esteve has plans for Heritage including doubling its assets under management to up to 14 billion francs. “Even if it sounds ambitious, it is probably what is needed today, given the constraints that have been imposed on our business,” he said.

(Reporting by Katharina Bart; Editing by David Holmes)

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Greece seeks negotiations on ECB bond repayment

ATHENS (Reuters) – Greece called into question on Saturday a major debt repayment it must make to the European Central Bank this summer, after acknowledging it faces problems in meeting its obligations to international creditors.

Finance Minister Yanis Varoufakis said Athens should negotiate with the ECB on 6.7 billion euros ($7.5 billion) in Greek government bonds held by the Frankfurt-based bank that mature in July and August.

Varoufakis did not say what he hoped to achieve in any talks, but he accused the ECB of making a mistake in buying the bonds around the time Greece had to take an EU/IMF bailout in 2010.

“Shouldn’t we negotiate this? We will fight it,” he said in an interview with Skai television. “If we had the money we would pay … They know we don’t have it.”

The government of leftist Prime Minister Alexis Tsipras promised to honor all its debt obligations when it struck a deal with the euro zone last week that extended Greece’s bailout program for four months.

But Athens will get no more money until the European Commission, ECB and International Monetary Fund have approved in detail its economic plans during the four-month period.

With tax revenue falling far short of target last month and an economic recovery faltering, the state must repay an IMF loan of around 1.6 billion euros in March and find 800 million in interest payments in April. It then needs about 7.5 billion in July and August to repay the bonds held by the ECB and make other interest payments.

The ECB bought the bonds on the secondary market under its Securities Markets Programme (SMP) which aimed to reduce borrowing costs for troubled southern European governments during the euro zone debt crisis.

However, Greece was frozen out of international debt markets, and more than four years later is still unable to fund itself commercially apart from limited issues of short-term treasury bills.

Varoufakis, who has staged a media blitz in recent days to sell the euro zone deal to the Greek people, singled out former ECB President Jean-Claude Trichet for criticism.

“One part of the negotiations will be on what will happen to these bonds which unfortunately and wrongly Mr Trichet bought,” he said. “I see it as a mistake – but the ECB did this with the aim of keeping us in the markets in 2010. They failed.”

Varoufakis argued that if the bonds had remained in investors’ hands, their value would have been cut by 90 percent under a restructuring of Greece’s privately held debt in 2012, reducing the burden on the state.

The ECB bought the bonds at a deep discount and made large profits because their value rose as the euro zone debt crisis eased. Under Greece’s second bailout deal, these profits were due to be returned to Athens to help it repay debt.

Athens received a partial payment in 2013 but euro zone countries are withholding a further 1.9 billion euros pending the review of Greece’s economic plans. Varoufakis wants this money sent directly to the IMF to meet the March payment.

(Reporting by Costas Pitas and Lefteris Papadimas; Writing by David Stamp; Editing by Hugh Lawson)

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Brazil probe of dictatorship period not satisfied by Volkswagen testimony

SAO PAULO (Reuters) – The leader of a truth commission investigating abuses during Brazil’s 1964-85 military dictatorship lambasted German automaker Volkswagen AG (VOWG.DE) at a hearing on Friday for providing what he called “unsatisfactory” testimony regarding its alleged ties with the regime.

In a contentious, nearly three hour-long session, Sao Paulo state legislator Adriano Diogo and several former Volkswagen employees pressed a company executive to explain whether and how the automaker collaborated with the right-wing regime.

Documents uncovered last year suggest that Volkswagen and dozens of other companies gave the dictatorship names, home addresses and other sensitive information regarding union activists on their payrolls in the 1980s.

The workers appeared on a so-called “black list” compiled by police. Some were then fired, detained or harassed by security forces and were unable to get new jobs for long periods afterwards, a Reuters investigation found.

Volkswagen, which had more workers on the list than any other company, was one of three companies called to testify on Friday before the Sao Paulo state commission, chaired by Diogo, a member of Brazil’s ruling Workers’ Party.

The other two companies, Brazilian industrial firms Grupo Aliperti and Cobrasma (CBMA4.SA), did not send representatives.

Rogerio Varga, a manager of legal affairs for Volkswagen, said the company respected the work conducted by various truth commissions across Brazil, but it was still reviewing internal files to see whether allegations of collaboration were true.

“There is no document in any archive that has been uncovered that places the institution of Volkswagen in collaboration with any violation of human rights,” Varga said.

The information on workers on the “black list” could have been obtained by police or unions instead of provided by the companies, Varga said.

“The company has nothing to hide,” Varga said.

At the hearing’s conclusion, Diogo called Volkswagen’s testimony “absolutely unsatisfactory.”

“To come here without any kind of information, without any recognition of the role companies played, they continue to laugh in our faces,” he said.

The probe’s leaders said they would provide the information gathered on Friday to federal prosecutors. Some legal experts have said companies could face civil lawsuits or demands for reparations based on truth commissions’ discoveries, although others doubt the evidence is solid enough.

Former Volkswagen employees present also expressed frustrations. Lucio Bellentani, 70, said he was arrested inside a Volkswagen factory by police in 1972 with the aid of a senior company executive.

Bellentani, 70, said he was beaten and then taken to a jail, where he was held for more than a month.

“I’m mystified by some of the things that were said here today … that Volkswagen never … hurt human rights,” Bellentani said, addressing Varga. “I don’t know, I think you’re on another planet.”

Varga replied the company only learned of Bellentani’s story in December, and that it was “difficult to understand what Volkswagen’s role might have been.”

“We listen to that account with lots of respect, and we continue to search for information,” Varga said.

(Editing by Ken Wills)

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Jobs report may test market’s complacency

NEW YORK (Reuters) – The U.S. stock market has been quiet this week – too quiet.

Wall Street has traded in a tight range of late, with both volatility and trading volumes drying up as the earnings season winds down and Federal Reserve Chair Janet Yellen’s recent Congressional testimony delivered no surprises.

While markets have held near record levels, there are signs equities have gotten stretched and could be vulnerable next week, when a number of key economic indicators come out.

If any of those, including the February payroll report, extends a recent trend of disappointing data, that could shock indexes out of their ranges and send them lower.

About 238,000 jobs are expected to have been added in February, according to the non-farm payroll report that will be released on Friday, down from the 257,000 added in January. Separately, readings on both the manufacturing and services sectors are on tap, as is a report on factory orders.

“Economic data will be the biggest driver of market moves over the next month, and the key one is the jobs report,” said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Asset Management. “Right now, there continues to be a reasonable amount of skepticism regarding the market outlook.”

Recent data has pointed to weakening conditions. Growth slowed more sharply than initially thought in the fourth quarter, while the Institute for Supply Management-Chicago Business Barometer’s fell to its lowest since July 2009.

The SP 500 has not seen a 10-percent correction since mid-2012. Valuation remains a concern.

The SP 500 .SPX has a price-to-earnings of 17.4, above its historical average of 14.8. On a forward P/E basis, most of the SP’s sectors also look expensive, with financials the only sector with a P/E below the benchmark’s historical average.

“I’d have to go outside the stock market to find areas of value,” said McDonald, who oversees $932 billion. “There just aren’t individual pockets of the market that you would describe as cheap.”

Over the past five sessions, an average of about 6.26 billion shares traded on all U.S. platforms, according to BATS exchange data, nearly 8 percent below the month-to-date average of 6.8 billion. The SP moved in its narrowest range since Christmas Eve on Friday; it is also closing out its narrowest weekly range since Thanksgiving this week.

Despite the thin trading, the Dow .DJI, SP and Russell 2000 .RUT all hit record levels this week. The CBOE Volatility index .VIX, a measure of investor anxiety, on Friday fell 2 percent to 13.61, well under its historical average of 20. The volatility index for the Russell .RVX is also well below its historical average, falling 1.2 percent to 16.06 on Friday.

“The billion-dollar question is, has everyone gotten so complacent that we could see things roll over?” said Michael Matousek, head trader at U.S. Global Investors in San Antonio. “If nothing changes, investors may just keep following things higher, but the high in the Russell and the low in Russell volatility suggest things could really take a hit if anything bad happens.”

Some of the market’s biggest recent gainers could be the most vulnerable to a pullback. The Nasdaq biotech index .NBI has rallied for three straight weeks, up nearly 7 percent over that period. Small-caps could also be ripe for profit-taking, with the SP 600 small-cap index .SPCY up for four straight weeks, gaining 6.4 percent over that period.

Nick Sargen, chief economist at Fort Washington Investment Advisors in Cincinnati, said these sectors were “difficult calls since they’ve had phenomenal advancements,” though alternatives were hard to come by given the headwind large-cap stocks face from a stronger U.S. dollar.

“The market is no longer cheap,” he said. “I’m not worried about a selloff of 20 percent, but I keep waiting for a clear signal that the economy is really accelerating. Until I get that, I have to temper my enthusiasm.”

(Editing by Nick Zieminski)

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