BECKY QUICK: We haven't even gotten a chance to talk about one of the issues that people really have been waiting to hear from you on. Kraft yesterday raising its bid for Cadbury and Cadbury accepting that raised offer. You voted 'no' when they asked you if they could be issuing more shares. But what do you think about the bid now?
WARREN BUFFETT: I feel poorer. (Laughs.) Kraft, in my judgment, well just in the past two weeks there's been two things that caused me to feel poorer. They sold a very fine pizza business and they said they got 3.7 billion for it. But, because it had practically no tax basis, they really got about 2.5 billion. They sold a business for 2.5 billion that Nestle is willing to pay 3.7 billion. Now can Nestle run it that much better than Kraft? I doubt it. But that business that was sold for 2.5 billion earned 280 million pre-tax last year. But they sold that at less, right around nine times pre-tax earnings in terms of their own figure. Now they mentioned paying 13 times EBITDA for Cadbury, but they're paying more than that. For one thing, EBITDA is not the same as earnings. Depreciation is a very real expense. But on top of that, they've got a billion-three they're going to spend of various rearrangements of Cadbury. They've got 390 million dollars of deal expenses. They are using their own stock, 260 million shares or something like that, that their own directors say is significantly undervalued. And when they calculate that 13, they're calculating Kraft at market price, not at what their own directors think the stock is worth. So, the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it's hard to get rich doing that. And I've got a lot of doubts about the deal.
BECKY: You are the largest shareholder at 9.9 percent of the company. You don't get the chance to vote this deal up or down. What do you do?
BUFFETT: (Laughs.) They took that away. They needed the vote originally but if they get a consensual arrangement sort of thing with Cadbury, and that may be, you know, if they paid up enough they were going to get it. So, who knows whether the last 20 pence or something - What it did was eliminate my chance to vote on it.
JOE: There's another way to vote, Warren, and that's with your feet. Is that what you're telling us you're going to do.
BUFFETT: That gets expensive. (Laughs.) Well, if I don't like what's going on in the government, that doesn't mean I have to leave the country either, Joe.
JOE: Fine. But I can't believe what I just --
BUFFETT: But, it's --
JOE: It was a peak -- I know --
CARL: We've got to stop you because we have breaking news to bring you, and it is almost eight-thirty.
CARL: Warren, Joe and I, our jaws are agape at the comments you just made about Kraft. We're watching --
JOE: The stock's down
CARL: We had (Bill) Ackman on in the past couple of hours and we talked about the deal and assumed because it would appear to be going through pretty well, that it had your tacit consent. That's clearly not the case.
BUFFETT: No. If I had a chance to vote on it, I'd vote no, but I don't have a chance. One of the things particularly interesting for the people that pay attention to corporate governance, Kraft issued a 78-page proxy statement close to a month ago. And the sole issue was the issuance of 370 million shares of Kraft stock. That was the only thing to be voted on. And in 78 pages, they told you about a deal that wasn't going to happen, and they told you a lot of other things about how the directors recommended this and everything else. There's one thing that they didn't tell you. They didn't tell you what the directors -- how the directors felt about the value of Kraft stock. Now, after I came out and said Kraft stock was significantly undervalued, the directors immediately came out and said they thought it was significantly undervalued, too. What point could possibly be more important when asking shareholders to vote on issuing 370 million shares is the director's views on whether they were going to get fairer value for these shares? In other words, if the directors thought those shares were significantly undervalued, when they issued that proxy statement, I think they had the duty to tell shareholders that they felt that way. Otherwise, you know, the shareholders could assume that they were getting fairer value for the shares.
JOE: Warren, I know at management, you go into a company and you talk about you're comfortable with management, you love the company's business, things like that. This is the hallmark of (CEO) Irene Rosenfeld's stewardship of Kraft. You're just saying it's a bad deal. Is that not going to cause you to reevaluate your stake in Kraft down the road if the manager, in the most significant decision she makes, goes directly against what you think is the right thing to do?
BUFFETT: Well, I think -- I think Kraft has got a wonderful portfolio of businesses including their pizza business which Nestle now has, having paid $1.2 billion more for it than we received in terms of cash. I think the products -- you know, I'd love to own Oreo cookies or A-1 Sauce or whatever it may be personally. And I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal. I think she's a decent person. She could be a trustee under my will. I just don't want her making this particular deal.
BECKY: We called Ackman the activist investor today. Hello.
BUFFETT: I'll go back into my shell. This may be Groundhog Day or something. Who knows?
JOE: I told you about that pizza deal, but with me it was, Kraft makes cheese. Pizza has cheese. Then there's chocolate. And it just didn't seem to be this, you know, Smucker's with Jif peanut butter. I understood that one, peanut butter and jelly.
CARL: I said your analysis was a little more astute than based on what flavors go well together.
JOE: You talk multiples and all this other stuff and pre-tax. But, I mean, it is telling that selling a very good business to be able to do it, you know, looks like a good idea unless you look closely, right?
BUFFETT: Well, when you look closely, you find $3.7 billion becomes $2.5 billion. And it was an enormously tax inefficient way to get rid of it. If you wanted to sell it, it was tax inefficient. Back when Kraft got rid of Post cereals, they did it in a tax-efficient way. It's not that they don't know how to do it, but in this case, they did it in an enormously tax-inefficient way. When you have a business with virtually no basis, Procter & Gamble's gone through this, Kraft, other people. There are ways to handle spinoffs that avoid cutting the government in for almost one-third ownership of the business. And unfortunately they headlined the $3.7 billion. I don't think I've read anyplace about the fact that they're only getting $2.5 billion. And it was Nestle that pointed out that this business does $2.1 billion in sales and makes $280 million. And giving up $280 million of earnings in a business that's been growing over the years for $2.5 billion of cash, I think, is a big mistake and I think it's a bigger mistake when you're paying -- probably counting all of the costs involved including the undervaluation of the Kraft shared given, you're probably paying in the range of maybe 17 times earnings for Cadbury, I think is a big mistake.
BECKY: You said at this point you don't have a vote in this. The only way you can vote is with your feet to sell the shares. You said that gets expensive. Does that mean you're staying in this despite the fact that you hate the deal?
BUFFETT: I think Kraft is still undervalued. I just don't think it's as undervalued as three weeks ago.
BECKY: We showed a bid/ask, the shares are off by more than 2%. Based on your comments today, people will think you're off your rocker. You're shooting yourself in the foot.
BUFFETT: No, Kraft is, in my view, and probably Bill Ackman's view, Kraft was significantly undervalued. It's just less undervalued because it's issuing a bunch of stock at a cheap price, and it's paying a full price and it's sold a good business. That hurts the value. Now, how much it's hurt the value? Does it hurt at the $2, $3 a share? I thought it was worth a lot more than $27 or $28.
JOE: How does the Cadbury valuation measure up with the Wrigley Mars valuation, Warren?
BUFFETT: Well, the Wrigley Mars valuation was a very high valuation. We were a financing partner in that. There's no question that the Wrigley valuation was a high valuation. Mars --
JOE: That's the difference, though, as a financing partner.
BUFFETT: But that is no reason -- that is no reason to pay the same price for something else. I mean, I have investment bankers come around me all the time and say this thing sold at 14 times earnings and therefore you could pay 13. I say, you know, we set our own standards for what makes sense.
BECKY: Why does Burlington northern make sense? If you're going to be splitting the stock and paying for part of the deal in stock which you traditionally hate doing.
BUFFETT: I hate it. I've written the annual report and I say that I enjoy issuing shares at Berkshire about as much as I enjoy prepping for a colonoscopy. This is not my idea of fun. And truthfully, Burlington shares -- shareholders are receiving $100 a share. It's costing us somewhat more than that because I do consider Berkshire at selling lower ratios to book value than it has in many years. We are giving up something that I don't like to give up in which I think is somewhat underpriced. So it's costing us a little more. On the other hand, we already own 22.6% which we bought for cash. We gave the minimum amount of stock we can do in this. We're getting $22 billion deployed in cash that I like overall. But it was a very, very close thing. If we had to give any more stock, we wouldn't have done the deal. I've never said this is a bargain deal. I think it's a great long-term asset for us to own. And I think it's something where we'll get a chance to use cash intelligently over the next century. But it is no bargain deal. I wish I would have bought the pizza business at nine times pretax earnings. But one doesn't preclude the other.
BECKY: Wow! Does Irene Rosenfeld -- you said you've had conversations with her. She knows exactly how you feel?
BUFFETT: Sure, I know how she feels. It's very cordial. She's a very decent person. And she is saying exactly what she believes. There's no question about that. I'm saying what I believe, as you can tell, too. It's a difference of opinion. You know, they may evaluate money. Of course, you get investment bankers in the picture. Everybody basically, there's a deal momentum that gets created in any transaction. That's not unique to Kraft. I've seen that -- I've been on 19 boards. I've seen it for 50 years. Maybe I'm susceptible to it, too. Maybe when I hear that choo choo, I get carried away myself. We did pay right up to the absolute hilt for Burlington, no question.
BECKY: Have you heard from any of you other companies you own major stakes in, once they see you taking this activist bent, does that worry them?
BUFFETT: They figure I've gotten it out of my system so they don't have to worry, and they're right. No, we feel good -- I feel good about Irene as an operator. She will do as good a job with this as can be done. It's just what was paid for.
BECKY: You recognize the irony that when you came out and voted no against the issuance of stock for Kraft so that they could go ahead with this deal, you drove up Kraft's share value. People thought, okay, they're not going to overpay for this. And that, in turn, allowed Kraft to go ahead and make this higher bid without having to ask your permission on stuff.
BUFFETT: It's worked out that way. I mean, I guess they would have gone up anyway.
BECKY: They would have.
BUFFETT: I don't know that and nobody knows. Clearly, they want the deal, you know. I've seen this so many times. If you really want the deal, you know, you'll have all the people that work for you telling you to do -- you know, it's team spirit. It's winning. It really isn't a win. Whenever a company makes a deal, I go to the store and I buy a congratulations card and I buy a sympathy card. And then five years later I decide which one to send.
BECKY: Let's talk about a couple of your other holdings. There was some news, I think it was yesterday, POSCO, the Korean steel company, put out a press release and said Warren buffett plans to buy more shares in the future. Is that true?
BUFFETT: I think I have to brush up on my Korean a little bit. I said that I like the company a lot. I said I wished I had bought more when it was a lot cheaper within the past year. It got way down in terms of price. It's a wonderful company, but I don't have plans to buy more. If it went down significantly, I might very well buy more. Certainly I have no plans to sell any. But no, we have no buy orders in.
BECKY: So that could be lost in translation?
BUFFETT: I think it was, yeah.
BECKY: Another deal that was a big talk this week was Swiss Re, your taking on a little over $1.25 billion worth of business for them?
BUFFETT: Over time, that contract will probably result in perhaps $50 billion of premiums. It's the largest -- to my knowledge, it's the largest insurance contract ever written.
BECKY: The largest insurance contract ever written.
BUFFETT: I wouldn't be surprised. I can't prove that.
BECKY: I read the Swiss release, and it said that they are doing this because they think that they can get more for their money in other arenas. I think their goal is to get more than 14 times. Right, 14%., 14% for the investment they're putting in. What's your reason for why you take it on?
BUFFETT: I think we'll make money. It's very simple. Now, if there's something terrible, pandemic or if there were some incredible terrorist attack that resulted in mortality in the United States, increasing by a dramatic amount because this is U.S. life business, it's spread all over. I t's not just a few policies. It's millions of policies. Probably hundreds of thousands, certainly. But anything that would change the mortality rate of the United States dramatically upward for any sustained period would be bad for us on this. But if mortality is more or less normal, and particularly if there's some improvement due to medicine over the years and so on so that mortality improves in the country, then we've got a decent, long-term deal. But they've got their own reasons in deploying capital in other areas. It can be a good deal for both sides.
BECKY: We talked with Dave Sokol before you came on about an hour ago. He was talking a little bit about what he sees in the housing market. Obviously, Berkshire has a pretty good feel from a number of its different businesses on where things are headed.
BUFFETT: It was interesting. I heard Rich a few minutes ago talk about the housing numbers -- housing starts being a bad number. You want a bad number for a while. The only way you clean up an excess inventory is to have more demand than supply. We had more supply than demand for three or four years in housing. We produced 2 million housing units a year. We created 1.3 million households. Result: trouble. And the longer you do it, the more overhang in inventory you have. The only way to clean it up, one way, you can start getting 13-year-olds to start co-habiting and create more households that way. I'm sure we'd get a lot of volunteers among 13-year-olds. But if you're going to have normal household formation, you've got to have subnormal housing production to work off the inventory. The lower the number is temporarily, the better. It's bad for our brick business. It's bad for our carpet, it's bad for our insulation business, all kinds of things.
BECKY: It's bad for jobs and that presents a problem for the administration.
BUFFETT: We created the problem. We could have a cash for clunkers program on houses. If we would blow up 3 or 4 million houses today the housing shortage would be over, it would be in the right place. It wouldn't be my house or your house. But if you have an inventory overhang, you have to have demand be greater than supply for a significant period of time to work it out. And we're well on the way to that. A lot of the housing problem is behind us. The commercial real estate problem is not behind us. But the housing is.
BECKY: But are you saying that the administration should not have put in some of these programs to try and ease the pain along the way? Like a cash for clunkers, like the mortgage tax deduction that you can get?
BUFFETT: Well, cash for clunkers, the idea is if you destroy a bunch of cars, people will need to buy more cars. You could have cash for cream puffs. Bring in your brand-new car you bought yesterday and blow it up, destroy it, and then you'd have demand for one more car. You can always create demand in something like cars, you know, just say half the cars in the United States have to be destroyed tomorrow morning. You'd have the biggest car deal you've ever seen. So those kind of programs -- and we did some of that in the New Deal. You do it when you force farmland to become fallow for a while. You decrease the output of crops. All kinds of ways of interfering with, you know, with changing the supply/demand situation. But overall, I think particularly if you go back to the fall of 2008, overall, our government has warded off something that would have been very, very, very much worse. I mean, I give the government credit overall. I can knock this program or that program. But overall, the government's done a good job.