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Buffett plays down health concern, mulled megadeal

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05/05/2012 | 11:19pm CEST
Warren Buffett tosses newspapers at the Clayton Homes booth during the Berkshire Hathaway Annual shareholders meeting in Omaha

Warren Buffett tried to allay fears of Berkshire Hathaway Inc shareholders about the company's future after he was diagnosed with prostate cancer, and revealed that he recently tried to make one of the biggest acquisitions of his storied career.

The question of who will succeed Buffett, 81, as chief executive became more of an imperative after Buffett disclosed the diagnosis on April 17.

While Buffett called it "a really minor event," his early-stage prostate cancer was a reminder that for all his success as an investor and all the plaudits he gets, Buffett is mortal and would be hard to replace at the company he has run since 1965.

That made the future of Berkshire, with or without Buffett, a central focus of the five hours of questions at its annual meeting on Saturday in downtown Omaha, Nebraska.

"I don't think that every deal that I made would necessarily be makeable by a successor, but they'll bring other talents," including skills to be an effective chief risk officer, Buffett said. "We're not going to have an arts major in charge of Berkshire."

Charlie Munger, who is Berkshire's 88-year-old vice chairman and sat beside Buffett, quipped: "I rather resent all this sympathy and attention that Warren is getting. I probably have more prostate cancer than he does."

The annual meeting is the centerpiece of a weekend of events that Buffett has dubbed "Woodstock for Capitalism." Close to 40,000 shareholders were expected to attend this year.

Buffett on Saturday also said that he recently considered a more than $20 billion acquisition, and would have sold some Berkshire stock holdings he wanted to keep to get it done.

"I wish we could have made it," he said. "It could happen. I don't think it will happen."

Buffett did not name the target. A takeover of that magnitude would have been close in size to Berkshire's biggest takeover -- the $26.5 billion purchase of railroad company Burlington Northern Santa Fe in 2010.

It would have also dented Berkshire's $37.83 billion cash hoard. Buffett said he wants to keep $20 billion on hand. Berkshire has about 80 operating units, which sell such things as car insurance, chemicals, clothing, furniture and ice cream.

WAL-MART, POSSIBLE SUCCESSORS

This year's meeting had fewer fireworks than the 2011 meeting, which was dominated by the then-recent, scandal-driven resignation of Buffett heir apparent David Sokol.

Yet Buffett offered a blunt assessment on a scandal enveloping Wal-Mart Stores Inc, in which Berkshire held a $2.33 billion common stock stake at year end.

Last month, the New York Times said the retailer's majority-owned Wal-Mart de Mexico unit ran a widespread bribery campaign in that country to win market dominance, and that senior Wal-Mart executives tried to cover it up.

"If you read the New York Times story, and there's always another side to it, it looks like they may well have made a mistake in how that was handled," Buffett said.

He nonetheless said he did not believe the matter "changes the fundamental dynamic" about Wal-Mart or its earnings power.

Among the internal candidates seen as possible future Berkshire chief executives are Ajit Jain, Buffett's top insurance lieutenant; Matthew Rose, who leads Burlington Northern; and Greg Abel, who runs the MidAmerican Energy unit.

Tony Nicely, who runs the Geico auto insurance unit, has long been seen as a candidate, but is now in his late 60s.

"I virtually know that the successor we have in mind ... has the culture and the people embedded as I do," Buffett said.

Buffett has also hired two portfolio managers, Todd Combs and Ted Weschler, to handle some of Berkshire's investments. He said each was recently given another $1 billion to invest, boosting their portfolios to $2.75 billion each.

The meeting took place one day after Berkshire said first-quarter profit more than doubled, as its insurance business was spared the huge losses that natural disasters in Australia, Japan and New Zealand caused a year earlier.

Buffett even said that Berkshire is writing "a lot more" reinsurance in those countries, as well as in Thailand.

He was also upbeat about Berkshire's prospects, despite slow U.S. economic growth and the inability of the United States and other countries to get their fiscal houses in order.

"I would stay away from medium- or long-term government bonds, our own or those of other countries," he said.

Buffett also said that despite his huge investment in International Business Machines Corp, which topped $11.7 billion at year end, he would not plunge into other technology giants such as Apple Inc and Google Inc.

"The chances of being way wrong in IBM are probably less, at least for us," than in Google or Apple, Buffett said.

Though Berkshire shares have lagged broader stock and insurance stock indexes in recent months, shareholder enthusiasm at the meeting does not appear to have flagged. "(The) stock is a home run over the next five years," said Bill Smead, chief investment officer of Smead Capital Management in Seattle.

Berkshire did not repurchase shares in the first quarter, and Buffett said he would be comfortable repurchasing stock at a price of 1.1 times book value, and perhaps higher.

Buffett also said Berkshire may buy more newspapers. It owns the Buffalo News, just bought the hometown Omaha World-Herald, and is a longtime shareholder of Washington Post Co.

ANALYSTS TAKE THE FLOOR

As in recent years, Buffett and Munger fielded questions from shareholders and three journalists.

For the first time, they also took questions from three insurance industry analysts -- Barclays Capital's Jay Gelb, KBW's Cliff Gallant, and Dowling & Partners' Gary Ransom -- who each have the equivalent of a "buy" rating on Berkshire.

While some hoped the analysts would add depth to the meeting, some of their questions concerned relatively arcane matters such as mortality rates in insurance, or whether Geico would use electronics to track driver behavior. Gelb did ask the question that prompted Buffett's comment about a mega-takeover.

Prior to the questioning, shareholders were regaled with the annual comedy-infused movie made by Buffett's daughter Susie.

In one sketch, Buffett sang and played the ukulele with the cast of the TV show "Glee."

Another featured Buffett's secretary Debbie Bosanek, whose effective tax rate is higher than her boss's and helped inspire the Obama administration's proposed "Buffett rule" to raise taxes on the wealthy that recently failed in Congress.

Bosanek was shown with her feet up on her desk, discussing magazine covers. A helpful Buffett fielded phone calls for her.

(Reporting By Ben Berkowitz in Omaha; Additional reporting and writing by Jonathan Stempel in New York; Editing by Bernard Orr and Tim Dobbyn)

By Ben Berkowitz

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