Wednesday, February 02, 2005

Sell that Deal

Holman Jenkins takes a shot at Warren Buffett today in the WSJ that strikes me as legitimate. Why is the normally secretive Buffett advertising that he's going to buy more stock before the Proctor & Gamble-Gillette deal closes and appearing on videos on PG's website? You know he'd be kicking and screaming if he were on the other side of this deal, with P&G paying as much as they are. Sure, he's buying more, but getting up to 100 million shares (his stated goal) will require what for Buffett is chump change at this point. What's it going to cost him -- $50 million? Out of the $25 billion (or more) that he has in cash? His 10% piece of Gillette, after all will be a sliver of P&G. Warren, baby, take a stake.

Nothing's wrong with some salesmanship, I suppose; he's a capitalist, as a colleague reminds me, not a saint after all (though I maintain that he must have significant ascetic tendencies for living in Omaha).

I suspect that Jenkins' remarks about the meaninglessness of share buybacks are probably less well-founded. But one has to wonder how many buybacks take place when the stock is high, making the trade of cash for stock a wash (or worse than that, a capital-destroying proposition) for shareholders. But if the trade can be a wash or descructive of capital, it can also be accretive if the shares are purchased at a cheap price. Share buybacks aren't in and of themselves neutral, as Jenkins argues; like anything else, they depend on what you pay for the stock. Finally, one must consider that even if you slightly overpay, over time an investment in a decent business usually outperforms cash in the bank. So the burden is probably more on Jenkins to say why buybacks, which increase owners' share in the business, are bad rather than on the proponents of buybacks.

It's interesting how Colgate and Unilever have reacted the past few days -- quite well actually. The market, judging by the action of those two stocks, doesn't seem to view the merger as such a "dream deal" -- at least not the way that Gillette shareholders do. Though their recent performance could be the result of grumblings about deals involving them too.


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