1996: How did Berkshire size the offering of class B shares?

AUDIENCE MEMBER: Hi. I’m Matt Zuckerman from Miami.

I don’t know, I think Charlie is the same class as Ev Dirksen. You know, $3 billion, we’ll soon be talking about real money. (Laughter)

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: The two questions I have, basically, are, one — number one, referring to the gentleman over here before who commented on your popularity, which will definitely affect the stock, don’t you think —?

And the second part of that is that even my wife’s beautician has put in for some shares of this stock, and he represents a small tip of a large group who are probably doing the same thing on the one hand, so that there’s going to be a large popular demand for the stock, which probably is not reflected in the numbers that the selling brokers are getting from institutions.

And number two, mutual funds themselves, in order to lend some panache or glamour or whatever to their portfolios will certainly be sucking up Berkshire stock after this.

And have you taken all of this into consideration when you decided upon the number of shares to go — that you’re sending out, number one?

And number two, that the reaction, at least in the first 14 days, of the public to the shares, which will probably be in the range of $1,100, might not send the B shares up high enough to make a very, very interesting spike in the price of the A stock.

WARREN BUFFETT: Well, I — we’ve considered what you’re talking about. I think that the issue has been well enough publicized that the demand will largely be reflected on the books of the underwriter in a day or two.

And I see no reason at all for a spike in the stock. I mean, the way we’ve designed it should really prevent that. We — and we tell people not to expect it.

If any institution wants to buy it, if any individual wants to buy it, they’re going to have a chance to do it.

And I don’t see any reason why there should be some huge influx of people immediately subsequent to the offering that didn’t hear about it during the offering period.

It’s interesting. I think most of the demand will be retail and smaller holdings, not so much institutional.

The — most new offerings are done in a manner where the idea is to have far more demand than supply, and therefore cause people to, maybe, order stock they didn’t even want, and just on the idea that this restricted supply will cause a big jump the first day, whether, you know — you’ve seen Yahoo or a number of other offerings.

I think — I don’t personally like that sort of distribution arrangement because you’ll find that 30 to 40 percent of the issue will, perhaps, trade the first day. Well, I think — and, perhaps, at a lot higher price.

I think there’s something a little wrong with that kind of an offering, because the company obviously isn’t getting the proceeds that are equivalent to what people are willing to pay. And favored customers get the chance to flip the stock and really are getting paid an exorbitant underwriting fee themselves, even though they’re called purchasers, because they sell it the first day.

We will be very interested in seeing the volume in the B stock the first couple of days, relative to the amount of the issuance.

And I will be disappointed and I’ll be surprised if the trading volume in the B stock the first couple days, related to whatever the size of the issue is, turns out to be anywhere near as high as with most new issues.

I think that we will have a better success in finding people who really want to own it and who did not buy it to flip it, I think, by this method of distribution. But we’ll have a test of that. We will see what happens in trading volume.

And I invite you to look at the volume and compare it to the amount we issue and, then, look at that relative to other new issues this year and just see how successful we were in finding real investors rather than people who were buying it to sell it to somebody else the next day.