Understanding Your New League, This Is Not Fantasy Football
By Jeremy Conaway
Give this article a bit of patience; its relevance to your day-to-day lives will become clear shortly. Wall Street was abuzz this morning about yet another genius strategy employed by the iconic Berkshire Hathaway organization. It seems as though Berkshire Hathaway is purchasing a division of Phillips 66 using Phillips shares it already owns to finance the deal. The shares in question were acquired when Berkshire made an investment in energy giant Conoco in 2008, an investment that was widely viewed by Wall Street insiders as one of the worst in the long and phenomenally successful history of the Berkshire organization. In fact in Berkshire's 2008 annual report to its shareholders it reported the transaction as a "major mistake."
What occurred during the five years after the "mistake" serves as a lesson for everyone in the residential real estate business. In an attempt to make lemonade out of lemons Berkshire sold off much of its Conoco shares during the years following the transaction. Even with these efforts it was reported that losses from the investment exceeded one billion dollars. However, unnoticed by many was the Phillips stock that Berkshire got from the spinoff. During the same period Berkshire carefully acquired additional Phillips stock that, by the beginning of 2014, left it in a very good position to make this latest deal.
Now, for some of those shares (both original and subsequently acquired), Berkshire is getting a very profitable chemical division of Phillips. It is interesting to note that this is not the first time Berkshire has executed on this strategy. Another of its over 80 owed units, Lubrizol, also benefited from similar tactics. By following these strategies Berkshire has been highly successful in eliminating its competition. These are strategies that the real estate industry should expect to see.
Now let's work on that relevance. It is certainly common knowledge among our readers that in 2013 Berkshire Hathaway extended its long-time HomeServices of America investment in the residential read estate industry through a deal with Brookfield, a Canadian organization. This complex transaction created the purchase of the Prudential franchise unit and a subsequent division of its assets between Brookfield and Berkshire.
HomeServices of America (the previous Berkshire real estate industry investment) created the Berkshire Hathaway Home Services brand when it assumed a majority stake in the Prudential Real Estate and Real Living brands from Brookfield Asset Management leaving the relocation assets to Brookfield. This was necessary for a number of business related reasons including the need to replace the iconic Prudential Real Estate brand, which will self destruct over the next ten years pursuant to the terms of Prudential's sale of its real estate franchising arm to Brookfield.
Over the past several months an impressive number of large brokerages have switched from the Prudential brand to the new Berkshire Hathaway Home Services banner. It is believed that significant resources are being expended to encourage non-Prudential brokerages to similarly align themselves with the new effort.
The lesson here is that there is a new force within the residential real estate industry. Moreover it is a force that has an Olympic class record of changing industries and fortunes. As indicated above it is not a perfect force or even an omnibus one. It is however a force to be reckoned with and a force to learn from. Every individual associated with the American real estate industry should be recalculating their immediate and mid-term futures with this new force in mind.
As is always the case there is the classic decision to make. Is the new Berkshire Hathaway real estate play an opportunity or a threat? The answer is obvious, it will be whatever the current players want it to be. For those who take advantage of the new industry environment there will be benefits. For those who ignore it there will be diversions and excuses. For those who are new to the industry, let this stand as an example of the amazing opportunities that are coming their way. In the meantime there are certain guidelines that might be helpful.
- We need to recognize that the Berkshire Hathaway organization works at levels most of us can't even imagine. There are way too many conversations going on about the wisdom of their acquisitions and the colors of their logo. If the industry wants to learn and profit from this experience, leaders at all levels must raise their level of observation, knowledge and analysis.
- The fact is that experience in the industry has nothing to do with understanding how Berkshire Hathaway will impact this industry. Most of us will never really know what is in store for us until the ball drops on a new era.
- Understand that many of the industry's sacred cows are not going to survive the Berkshire Hathaway experience. How long will an organization whose profit expectations exceed twenty percent tolerate an entity that dreams about eight? Consider the current relationship between the industry and the traditional agent. Is it possible that Berkshire Hathaway will follow the traditional path and see the agent as their ultimate customer? Is it likely that executives and managers who refuse to engage the new environment will be seen as part of the solution?
- Appreciate that in all likelihood the winner of this contest will be the team with the highest level of innovation and the most concentrated level of creativity. For all of those who have had creative and innovative thoughts this is the time to put them into effect and make that difference.
In other words the arrival of Berkshire Hathaway into our industry should be greeted with cautious inspiration and a whole new focus on potential. There will undoubtedly be some pain, but when it is all over we will be better and stronger for the experience. Both you and Berkshire are going to make mistakes on the road forward but your ultimate success will depend upon how you recover from them.
Start thinking about how you and your firm will benefit. Now is the time to join the tide. We can do this.