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10th May 2022

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Warren Buffett’s heir apparent comes out of the shadows

More than a decade before Berkshire Hathaway investors finally got an answer to their most pressing question — who would succeed Warren Buffett — insiders at the company were already cultivating Greg Abel.

David Sokol, then the chief executive of Berkshire’s sprawling energy business, told Buffett in 2007 that he wanted to give his own job to Abel, arguing it was time for his self-described “right-hand lieutenant” to take the lead.

Abel had worked side-by-side with Sokol, negotiating some of its most complex deals, including a purchase of natural gas lines following Enron’s collapse that was done in the course of a weekend. Buffett, at first, demurred, but was eventually convinced.

“There’s a reason why in 2008 I turned the CEO title over to Greg,” Sokol said. “I had been doing it for a long time and frankly I thought Greg was better at it than I was.”

Abel had seen the potential in a small real estate business that came with the acquisition of a much larger utility; other executives had seen only a rounding error. That business is now one of Berkshire’s jewels, and one of the largest residential real estate brokers in the US.

Sokol also remembered the speed at which Abel moved to cut costs and improve the efficiency of newly acquired Northern Electric in the UK in the 1990s. Abel moved across the Atlantic to help manage the company.

“After two meetings we were sitting down and Greg had a sheet of paper with all these layers crossed out,” he said.

Sokol himself was once seen as the natural heir to Buffett, but he resigned from the company in 2011 after a scandal involving stock purchases in Lubrizol, a company Berkshire later acquired. US securities regulators probed the transactions but did not pursue charges.

A second existential question

Last week’s anointing of Abel by 90-year-old Buffett answered a question that has long hung over Berkshire Hathaway. But it has not put to rest another, arguably more pressing, debate: does Berkshire have a reason to exist without Buffett and his longtime consigliere Charlie Munger, 97, at the top?

Cast in Buffett’s image, the company is unlike almost any other in corporate America. It owns a vast collection of businesses that span insurers such as Geico, the Burlington Northern railroad, furniture stores, car dealerships and electric utilities. But equally important are the public investments — stakes in companies such as Apple and Bank of America — that make Berkshire more akin to a mutual fund than a regular business.

Abel, a 58-year-old Canadian, may be an outstanding operator but it is unclear whether he is also an astute investor, some investors have quietly said.

So far, investors have only had fleeting moments to get to know the man. Abel has been mostly media shy — he declined to comment for this article — and his appearances before the investment community have been brief.

In 2020, in the midst of the pandemic, he joined Buffett on an empty stage to answer shareholder questions. But his responses were limited, primarily about the businesses he oversaw, and he left his boss to dispense the sage advice that, for many investors, is the main purpose of a Berkshire gathering. It was only this month that shareholders were granted a little more substance.

The initial reaction has been warm, as Abel impressed analysts with his knowledge of the energy business and gave a strong pitch on how the company would reduce its carbon footprint. People who have worked with him described him as “highly driven”, “disciplined”, and possessing a “unique capacity” to sift through vast amounts of information, traits they also see in Buffett.

Ron Olson, a director on the Berkshire board, added that he was “a plain-spoken person” who had absorbed the company’s culture directly from Buffett and Munger over the past decade.

“He’s not going to be Warren in personality, but he has the same kind of credibility and integrity that has come through for Warren,” Olson said, adding that Abel had “a hell of a work ethic”.

“He grew up on the ice, playing hockey, and has a number of false teeth to show for it. That kind of competitiveness comes through.”

Energy to rise

Abel found his way to the company through one of its many acquisitions. After working as an accountant at PwC in San Francisco, in 1992 he went to work for one of the firm’s energy clients, a small business known as CalEnergy.

“Anything I asked him to do he did 125 per cent and then looked at things around it to do better as well,” Sokol said, who was running CalEnergy. “Greg needed very little mentoring. What he required was just being given the opportunities.”

CalEnergy under Sokol and Abel went on a dealmaking spree before Berkshire bought the company in 2000. Before he had turned 40, Abel had been elevated to president and chief operating officer of the energy unit, going on to own a valuable 1 per cent stake in it.

It was there where he gained much of his dealmaking chops. The division has accounted for some of Berkshire’s biggest takeovers, a fact that has not been missed by shareholders who grumble about the mammoth $145.4bn cash pile the conglomerate has amassed.

Abel has been deeply involved in Berkshire’s $5.1bn purchase of PacifiCorp in 2005, its $10.4bn acquisition of Nevada utility NV Energy in 2013 as well one of the company’s most recent deals: the $8bn buyout of Dominion Energy’s pipeline business last year.

“Much of M&A is dating and Greg . . . can be very charming when he’s dating,” said someone who has worked on deals with Abel.

Thomas Russo, the managing member of longtime Berkshire investor Gardner Russo & Quinn, said it was that ability to deploy “immense amounts of capital” that has made Abel the natural choice to succeed Buffett.

Whether Abel will be more successful than Buffett in putting a dent in the war chest remains to be seen. The Berkshire playbook, which has long eschewed bidding wars, has curtailed the company’s dealmaking at a time when other companies and investors are also flush with capital.

And Abel has not yet shown that he is willing to break the mould. The company’s 2017 failed $18bn bid for Oncor Energy, a deal Abel had all but sewn up before it was gatecrashed by another bidder, underlined how “Greg has stuck to that style,” said the person who worked on deals with him.

It is unclear how Abel would work with the rest of the team groomed by Buffett if he does take over, including Todd Combs and Ted Weschler, who help manage the company’s investment portfolio, and Ajit Jain, the Berkshire vice-chair who runs its valuable insurance operations. Jain described the pair’s relationship as respectful, albeit unlike what Buffett and Munger have cultivated over the years.

Investor scrutiny is only likely to increase as the cash pile grows and pressure mounts over Berkshire’s carbon footprint and barriers to competition. The company’s utility division, where Abel played a key role, has drawn particular scrutiny. Its Nevada energy business spent heavily in 2018 to defeat a proposal that would have deregulated the state’s power business.

“They protect their monopoly through any means possible,” said Nora Mead Brownell, who previously served as a commissioner of the Federal Energy Regulatory Commission. “I think Warren represents a certain set of values that get executed by the Greg Abels of the world,” she added.

While Abel has been chosen by the board, the company is not yet turning over the keys. The board has, after all, been preparing for succession for well over a decade.

“Warren’s got a lot of life left. I want to underscore that,” Olson said. “Greg is our man at the moment. If it’s 10 years from now, who the hell knows.”

2021-05-07 18:04:05

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