How Much is General Re Worth, Anyway?
Warren Buffett likes to say Dexter Shoe was his worst acquisition.
He not only bought the dying shoe business for $400 million in 1993, but he paid for it in his most precious currency: Berkshire Hathaway stock. As he wrote in the 2007 Berkshire annual report:
What I had assessed as a durable competitive advantage vanished with a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.
Yet General Re, the huge reinsurance business Buffett acquired in 1998 for $22 billion—reportedly without input from his partner, Charlie Munger—looks worse, at least on a dollar basis. While General Re, unlike Dexter, is not going away any time soon, it has caused Buffett the kind of aggravation he despises from companies in the Berkshire “family.”
Like, government investigation-type aggravation, which resulted in the conviction of four former General Re executives earlier this year for allegedly cooking up an insurance transaction to make AIG’s business look better.
Also, General Re had a derivatives problem—23,000 derivatives, to be more precise—that Berkshire spent years, and more than $400 million, unwinding back when derivatives could be unwound.
But more than that, Buffett paid for General Re in stock. $22 billion in stock. At the time, people said Buffett was selling high.
In the last decade, however, that stock as almost doubled. The current value of the General Re deal is now closer to $40 billion.
It is hard to imagine that for $40 billion, Warren Buffett could not have re-created General Re, with money to spare. Not being insurance types, however, we put the question to our readers: Was General Re worth $40 billion? Informed opinions are welcome.
Jeff Matthews I Am Not Making This Up © 2008 NotMakingThisUp, LLC
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.