Finance History | GEICO Headquarters, Chevy Chase, 2 January 1996 — US$2.3 Billion Bought the Other Half

On 2 January 1996, Berkshire Hathaway paid US$2.3 billion in 1996 dollars for the GEICO shares it did not already own, making the auto insurer a wholly owned subsidiary. The merger paid US$70 per share in 1996 dollars for the remaining stock. Berkshire subsidiaries already held 34.25 million GEICO shares acquired before 1981 for an aggregate US$45.7 million in pre-1981 dollars. That earlier position had grown without another share purchase. GEICO repeatedly repurchased its own stock, raising Berkshire's ownership from roughly one-third in 1980 to almost 51 percent immediately before the merger. The 1996 price looked very different from the cost of the first half. Paying about US$2.3 billion in 1996 dollars for the rest implied roughly US$4.6 billion of total company value in 1996 dollars, while GEICO then had US$1.9 billion of tangible net worth in 1996 dollars. The gap was economic goodwill rather than a factory or securities portfolio. GEICO sold directly to consumers, and its low operating costs helped it offer attractive prices while keeping policyholders profitable and loyal. Customers had paid GEICO US$2.8 billion of premiums in 1995 dollars. Berkshire therefore accepted a high price relative to tangible assets because the customer relationships could generate new business without requiring equivalent additions to physical capital. The deal also completed a three-stage insurance lesson. Berkshire bought into GEICO after its mid-1970s crisis, benefited as the insurer repaired underwriting and repurchased shares, then paid far more once renewed growth made the franchise clearer. The purchase departed from the balance-sheet bargain that had first drawn Buffett to Berkshire's mills. Berkshire was buying distribution efficiency, customer retention and future policy growth after management had demonstrated restored discipline. The Chevy Chase headquarters at 5260 Western Avenue is the public corporate site associated with that operating model. Its photographed offices give a physical address to an asset that accounting could record as goodwill but that depended on millions of recurring policyholder decisions. Photo: Coolcaesar, CC BY-SA 3.0, via Wikimedia Commons.