What have you always wondered about the economy? Tell Us

Warren Buffett finds tax advantage in Duracell deal

Dan Weissmann Nov 13, 2014
HTML EMBED:
COPY

Warren Buffett finds tax advantage in Duracell deal

Dan Weissmann Nov 13, 2014
HTML EMBED:
COPY

When Warren Buffett’s company Berkshire Hathaway buys the battery brand Duracell from Procter & Gamble, Berkshire will pay the $4.7 billion price tag in stock. Not Berkshire Hathaway stock, but Procter & Gamble stock, which Berkshire just happens to have.

Berkshire Hathaway did a very similar swap earlier this year, when it bought a TV station from Graham Holdings — formerly and better known as the Washington Post Co. Same thing when it bought a subsidiary of Phillips 66 last December. Why not just pay cash?

First, these trades line up with something Berkshire Hathaway has come to favor over time: Owning and managing whole companies. According to Larry Cunningham, a George Washington University law professor and the editor of “The Essays of Warren Buffett,” Berkshire was once happy to either own stock or a small stake in a business. He says as Berkshire grew, that outlook changed.

“Now, it prefers to own entire businesses rather than small positions,” he says. “So, this is a neat way to achieve that objective.”

Also, these swaps allow Berkshire Hathaway to save a boatload on taxes. Procter and Gamble’s stock is worth much more than when Berkshire bought it, so selling that stock would mean paying taxes on the profit — probably more than 33 percent.

Thomas Lys, a finance professor at Northwestern University’s Kellogg School of Management, has done the math. Berkshire originally bought its shares for $336 million, and the stock is now worth $4.7 billion.  

“So that’s a profit of $4.4 billion,” Lys says. “So a third of that is  hefty tax.” 

But in this deal, Berkshire isn’t selling the stock. It’s trading one piece of Procter and Gamble — the stock — for another piece, Duracell. Going for big tax savings seems like it would sit uncomfortably with Buffett’s role as the rich guy who’s always calling on the government to change the tax code and raise his taxesBut Lys says there is an important distinction to be made because Buffett is the CEO of Berkshire.

Warren Buffett has an obligation to his shareholder,” Lys says. “And that obligation is to pay as little as the code allows.”

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.