Finance History | IBM Headquarters, 31 December 2011 — US$10.9 Billion Built a 5.5 Percent Ownership Stake

On 31 December 2011, Berkshire Hathaway owned 63.9 million IBM shares acquired for US$10.9 billion in 2011 dollars, representing about 5.5 percent of the technology company. The position was one of Berkshire's two major marketable-security commitments during 2011 and marked an unusual move into a large information-technology business. Berkshire described the shares as a partnership interest rather than inventory for short-term trading, so the expected return depended on IBM's future earning power and capital allocation rather than an immediate change in its quoted price. Only dividends entered Berkshire's reported earnings from the holding, while Berkshire's proportional share of IBM profits retained inside the company did not appear directly in Berkshire's income statement. That accounting distinction made reinvestment important. Retained earnings could create value through productive research, software, services, acquisitions or share repurchases, but they could also destroy value if spent on businesses and technologies that failed to remain competitive. IBM's repurchases created a second mechanism. When a company retires shares below intrinsic value, each remaining share represents a larger claim on the business, allowing a patient holder's ownership percentage to rise without an equal additional cash investment. The same process works against owners when repurchases occur above intrinsic value, because corporate cash is exchanged for less business value than it could otherwise buy. The investment therefore carried risks that a low headline valuation could not remove: customers were shifting computing workloads, hardware and services faced technological change, and management had to convert a large installed base into durable future cash flows. Berkshire later reduced the position when its appraisal changed, demonstrating that describing shares as a long-term partnership did not make the original thesis permanent or eliminate the cost of an analytical error. IBM's headquarters at 1 New Orchard Road anchors the year-end ownership claim to the company allocating the retained earnings. The Armonk site represents a US$10.9 billion commitment in 2011 dollars whose outcome depended not only on operating profits, but on how effectively IBM reinvested cash and reduced its share count. Photo: Treesmittenex, CC BY-SA 4.0, via Wikimedia Commons.