The Wall Street Journal-20080124-breakingviews-com - Financial Insight- Buffett -- Swiss Re-s Insurer- Stake Looks to Investors Like Vote of Confidence- But Not in Broader Sector
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breakingviews.com / Financial Insight: Buffett -- Swiss Re's Insurer; Stake Looks to Investors Like Vote of Confidence, But Not in Broader Sector
Warren Buffett didn't invest in the troubled financial institutions -- from Citigroup to UBS -- that recently sought new capital. But the Sage of Omaha did just build a 3% stake in Swiss Re, valued at roughly $800 million. It isn't a huge deal for Berkshire Hathaway, which had nearly $50 billion of cash on hand at the end of September. Still, it looks like a vote of confidence in the downtrodden reinsurer's prospects.
Investors certainly took it that way, sending Swiss Re's shares up 11%, the biggest short-term pop in years. Reinsurance is one of Berkshire's biggest businesses, so Swiss Re shareholders may assume Mr. Buffett knows what he is doing. Others should think twice before following him, as Mr. Buffett may be able to get more out of Swiss Re than they can.
How so? Well, he struck a separate deal for Berkshire to assume a 20% share of the risk of all of Swiss Re's new property-and-casualty business for the next five years. That suggests Mr. Buffett is comfortable with the European company's underwriting criteria, even in a softening market. If Swiss Re writes business at a similar pace to 2006 and 2007, Berkshire could collect revenue of $3 billion or more this year alone and, potentially, an annual operating profit greater than its total investment in the reinsurer's stock. Swiss Re's revenue and operating profit would correspondingly fall.
This reinsurance revenue also comes with a European bias, fitting with Mr. Buffett's stated aim of diversifying away from U.S. dollar- based businesses when he can. And with downside protection in mind, he may think the twin deals will give him an insider's advantage if Swiss Re's business worsens.
Sure, there is some comfort for other Swiss Re shareholders. Aside from Mr. Buffett's endorsement, Berkshire's reinsurance deal -- as opposed to its ownership stake, which was bought on the open market -- frees up capital, some of which Swiss Re plans to spend buying back shares. Still, it is a stretch to look at Mr. Buffett's move as a bullish sign for other reinsurers, let alone the broader financial sector.
EBay's Bold Moves
Meg Whitman will be stepping down after a decade at eBay's helm. She deserves credit. She took a small Internet auction site with fewer than 30 employees and turned it into a behemoth with a market value of $39.2 billion. But recently, shareholders had reason to be impatient. The stock has lost more than one-third of its value in the past two years. Some of this can be attributed to Ms. Whitman's worst decision, eBay's $3.1 billion acquisition of Internet telephone provider Skype in late 2005.
Still, Ms. Whitman will leave eBay's next leader, John Donahoe, with a solid set of assets. He can make an early impact by finding better homes for two of eBay's big nonauction units -- Skype and the Internet pay service PayPal. Shareholders might attach less of a conglomerate discount to Ebay if he disposed of them.
Selling Skype is obvious and necessary. EBay already has written down the business's value by $1.4 billion, and it should be worth a lot more to other Internet players, notably social-networking giants Facebook and MySpace. Those sites' millions of users could be turned into Skype customers, and the Skype service looks like a good fit as an additional networking tool.
The more difficult decision will be spinning off PayPal. The highly profitable, secure electronic-payments business also could have greater value outside eBay. Other online shopping giants, such as Amazon.com, who don't use it now, could flock to the service if it weren't owned by a direct competitor. EBay's shareholders would cheer if Mr. Donahoe unlocked some of PayPal's potential.
Ms. Whitman's successor should thank her for handing over a company with attractive assets and a strong core business. But along with a fresh face, what the company needs is a bold move. Hiving off Skype or PayPal, or both, would fit the bill.
-- Richard Beales and Jeff Segal
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This column is by breakingviews.com, an online financial commentary site.
