Buffett Succession Plan at Berkshire Gets a Twist

By | March 14, 2008

There is a job change coming for an executive whom investors say could become the next Warren Buffett.

David Sokol, widely considered among the top candidates to eventually replace Buffett as chief executive of Berkshire Hathaway Inc, announced Tuesday that he plans to step down as chief of Berkshire’s utility unit MidAmerican Energy Holdings Co. He will remain chairman.

Many investors consider Sokol and Ajit Jain, a top Berkshire insurance executive, candidates to eventually succeed the 77-year-old Buffett, whose $62 billion net worth according to Forbes magazine makes him the world’s richest person.

Buffett has said Berkshire has three internal candidates, including one who could step in immediately, and would like any successor to be young enough to stay on for 15 years. Buffett’s son Howard would likely become chairman. Four other candidates are in the running to become chief investment officer.

“It’s still too early to know,” said Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner in Lancaster, Pennsylvania, including in Berkshire stock. “This is the first move affecting (someone on) the well-considered list of successors who is changing his day job.”

Berkshire spokeswoman Jackie Wilson declined to comment. Jain was testifying at a Congressional hearing in Washington and was not immediately available for comment.

Sokol was not immediately available for comment. He told the Omaha World-Herald that ending his 17-year run as MidAmerican chief executive will free him to work on acquisitions. MidAmerican operates several utilities and natural gas pipeline companies, and runs HomeServices of America, the No. 2 independent U.S. real estate brokerage.

“MINI-BERKSHIRE”

“Many people have called MidAmerican a mini-Berkshire,” said Mohnish Pabrai, managing partner at Pabrai Investment Funds in Irvine, California, who models his portfolios on early Buffett partnerships. “This heightens the odds that (Sokol) is one of the three guys. He’s the perfect age and has the diverse experience. Jain is probably right there, if it happens soon.”

Jerome Heppelmann, a portfolio manager at Liberty Ridge Capital of Berwyn, Pennsylvania, said Jain, who was born in India in 1951, “has the expertise in Berkshire’s core business, insurance, and his stewardship has been superb.”

Liberty Ridge sold Berkshire stock last year because other insurers’ shares offered better value, Heppelmann said.

Gregory Abel, who is MidAmerican’s president and runs its PacifiCorp utility, will replace Sokol as MidAmerican chief executive next month. Sokol works in Omaha, where Berkshire is based, although MidAmerican is based in Des Moines, Iowa.

“When somebody’s ready, they should get the opportunity,” Sokol, 51, told the World-Herald. “My 100 percent allegiance is to Berkshire and MidAmerican. I’m not going anywhere.” He said the change is unrelated to Berkshire’s succession plans.

OTHER CANDIDATES

Investors have suggested top chief executive candidates for Berkshire also include Joseph Brandon of reinsurer General Re Corp, Tony Nicely of auto insurer Geico Corp, and Richard Santulli of private airplane operator NetJets Inc.

But Nicely and Santulli are in their mid-60s. Investors have also mentioned Brandon’s name less following a controversial reinsurance transaction that led last month to a federal jury convicting four former General Re executives on fraud and conspiracy charges. Brandon was not charged.

Jain handles coverage for “mega-catastrophes” such as Hurricane Katrina. He also runs Berkshire Hathaway Reinsurance, which provides insurance for other insurers.

And in the last three months, Jain has spearheaded Berkshire’s drive to build a bond insurer from scratch as existing rivals such as MBIA Inc and Ambac Financial Group Inc struggle. Jain joined Berkshire in 1986, and he and Buffett have said they talk to each other daily.

In his shareholder letter this year, Buffett said Jain “has built a truly great specialty reinsurance operation from scratch.” Last year, he called that business “amazing.” In 2006, he called Jain an “extraordinary manager,” and the year before wrote: “Ajit’s value to Berkshire is enormous.”

Buffett in each of his last three letters called Sokol and Abel “terrific” managers, and in the previous two called both “brilliant” managers.

“I’ve been saying for three years that David Sokol is the obvious successor for Berkshire, and I may be dead wrong,” said Frank Betz, a principal at Carret/Zane Capital Management LLP in Warren, New Jersey, who invests $800 million and owns Berkshire stock. Betz has played bridge with Buffett.

“To me, it’s a clarion call,” he said. “(Sokol) has very successfully run MidAmerican. It frees him from the day-to-day responsibilities of running MidAmerican to do whatever else might be on his menu.”

(Additional reporting by Dena Aubin and Patrick Rucker; Editing by Tim Dobbyn)

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