Business & Management (SL) IA:

Commentary on:
¨¿Should Berkshire Hathaway invest in Amazon on to
increase market share? ¨

Candidate number: ***

Word Count: 1493

Page 1 of 18
Table of Contents
INTRODUCTION ......................................................................................................................... 3
 Background Business information ................................................................................... 3
 Global Business strategy ................................................................................................... 3
METHODOLOGY ........................................................................................................................ 4
COMMENTARY ONE: SWOT Analysis ................................................................................... 4
COMMENTARY TWO: Market share ...................................................................................... 5
COMMENTARY THREE: Economies of scale ......................................................................... 6
Internal Economies of Scale ..................................................................................................... 7
External Economies of Scale .................................................................................................... 7
CONCLUSION .............................................................................................................................. 8
APPENDICES ............................................................................................................................... 9
SUPPORTING DOCUMENTS .................................................................................................. 10
BIBLIOGRAPHY ....................................................................................................................... 15

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INTRODUCTION

 Background Business information

Berkshire Hathaway is a holding company for a large number of businesses, which it is run
by its chairman and CEO Warren Buffett. It´s headquarter is in Omaha, Nebraska and was
originally a company consisting of a group of textile milling plants.

In the mid-1960s, when Buffett became the controlling shareholder of the company he began
a progressive strategy of diverting cash flows from the core business into other investments.
As of September 07, 2019, Berkshire Hathaway had a market capitalization of about $500.61
billion1, making it one of the largest publicly traded companies worldwide.

 Global Business strategy

Due to the fact that Berkshire Hathaway is a holding company, not a retailer or manufacturer,
their global strategy is different from that of a company such as Samsung or Adidas. Warren
Buffett, is famous for being a value investor. Because of the uncertainty of foreign markets
and currency exchange rates Berkshire Hathaway create a global presence by purchasing
stock in American companies that have strong international sales. For example Amazon is a
company with a large foreign market and represents a substantial holding for Berkshire
Hathaway.2

1
Source https://www.macrotrends.net/stocks/charts/BRK.B/berkshire-hathaway/market-cap
2
Source https://sites.google.com/a/email.vccs.edu/bus100brka/strategies-for-reaching-global-markets
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METHODOLOGY

The decision to write the commentary on the way in which Berkshire Hathaway - through
Warren Buffer- is trying to invest in Amazon in order to increase its market share, was taken
because Buffet is a well-known and successfully value investor controlling substantial
percentages in other firms.

For this, the investigation was made in base of the Berkshire Hathaway SWOT analysis,
market share and Economies of scale in order to see if the decision made by Buffet, in buying
Amazon´s shares, was the correct one.

COMMENTARY ONE: SWOT Analysis

As we all know, ¨SWOT analysis is a strategic planning technique used to help a person or
organization identify strengths, weaknesses, opportunities, and threats related to business
competition or project planning.¨3 Its objective is to identify the internal and external factors
that are favorable and unfavorable in achieving the business objectives.

As we can observe from our SWOT Berkshire Hathaway analysis the most important
strength, is the way in which Buffet is investing in other well-known businesses. One of these
smart investment choices was Amazon. Warren Buffett’s Berkshire Hathaway has been
loading up on shares of Amazon. Berkshire upped its stake in the e-commerce giant by
11%.Berkshire now owns 537,300 shares of Amazon, worth $947 million. 4

Due to these clever choices the market value of Berkshire Hathaway has increased up to
$500.61 billion, being one of the most important holdings around the world.

According to the SWOT Berkshire Hathaway analysis the most important weakness for the
company are decision making limited to few individuals and Acquisition and investment
mistakes. The main decision maker for Berkshire Hathaway is Warren Buffet which made
him to have some regrets due to some decisions that he made in his life where he did not
listen to his important advisers.

Warren Buffett has been able to make several major and important acquisitions. However,
not all of the acquisitions he made were successful. Some of them missed and several
backfired as well. Right from the acquisition of Berkshire Hathaway Textile Company to
Tesco, Dexter shoe, Wabtec textile, and some others, Warren Buffett regrets his acquisition
of or over-investment in these stocks.

3
Source https://en.wikipedia.org/wiki/SWOT_analysis
4
Source https://www.cnbc.com/2019/08/14/warren-buffetts-berkshire-hathaway-raises-amazon-stake-by-
11percent.html
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COMMENTARY TWO: Market share
A company's market share is the percentage it controls of the total market for its products
and services5.

One of the ways in increasing the market share among innovation, strengthening customer
relationships, smart hiring practices, is acquiring competitors. By doing so, a company
achieves two things:

- It taps into the newly acquired firm's existing customer base

- It reduces the number of firms fighting for a slice of the same market by one.

A smart investor, like Buffet, always has his eye out for a good acquisition deal when his
company, is in a growth mode Berkshire Hathaway. A real good acquisition when Berkshire
started buying stock in the cloud-computing and e-commerce giant, Amazon, in the first
quarter of 2019. The company bought 483,300 shares of Amazon at the time. But Berkshire
owned 537,300 shares as of the end of its second quarter, according to the holding company's
most recent filing with the Securities and Exchange Commission. This means Berkshire
added 54,000 shares to its Amazon holding. The company's total stake in Amazon is now
worth $957 million as of this writing.6 With these shares bought Berkshire has increased its
market value by 11%.

5
Source https://www.investopedia.com/ask/answers/031815/what-strategies-do-companies-employ-
increase-market-share.asp
6
Source https://www.fool.com/investing/2019/08/15/berkshire-hathaway-buying-amazon-stock-should-
you.aspx
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COMMENTARY THREE: Economies of scale

Economies of scale are cost reductions that occur when companies increase production. The
fixed costs, like administration, are spread over more units of production. Sometimes the
company can negotiate to lower its variable costs as well. 7

Source: https://www.thebalance.com/economies-of-scale-3305926

Economies of scale give a competitive advantage to large entities over smaller ones. The
larger the business the lower its per-unit costs.
We find two main types of economies of scale:
- Internal
- And external.
Internal economies are controllable by management because they are internal to the company.
External economies depend upon external factors. These factors include the industry,
geographic location, or government.

7
Source https://www.thebalance.com/economies-of-scale-3305926
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Internal Economies of Scale

Internal economies result from a larger volume of production. This is typically seen in large
organizations. There are five main types of internal economies of scale:
a. Technical economies of scale- result from efficiencies in the production process itself.
b. Monopsony power- when a company buys so much of a product that it can reduce it’s
per unit costs.
c. Managerial economies of scale - occur when large business can afford specialists.
d. Financial economies of scale- the company has cheaper access to capital.
e. Network economies of scale - occur mostly in online businesses; any revenue from
the new customer is all profit for the business

External Economies of Scale

A company has external economies of scale if its size creates privileged treatment. That most
often occurs with governments.

A holding company, like Berkshire, is an organization that deal only with the financial
development of other concerns and produces nothing valuable of itself. Therefore, the
question of economies of scale does not deal with production, but must be found elsewhere.
The single relevant fact is that Berkshire is an investment company that manipulates capital
in such a way that returns are normally higher than if these were invested separately.

As is well known, Berkshire Hathaway owns a substantial share in GEICO Insurance, Coca
Cola, American Express, Google, Amazon, Acme, Shaw Construction and many others over
nearly all sectors. Annual revenue is about $ $247.837 billion, and average growth since
Buffet took over in 2010 has been about 55%.8

Due to the largeness and the Berkshire Hathaway wealth, banks could offer them substantial
and attractive line credits. The point is that the size of Berkshire Hathaway gives it the
celebrity influence to get first dibs on anything that comes around.

8
Source https://www.macrotrends.net/stocks/charts/BRK.B/berkshire-hathaway/revenue
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CONCLUSION

It appears that Buffet decision to invest in Amazon, through acquisition of sharing, was a
good one, since the Berkshire Hathaway shares had an increment of 11% in the global stock
market. Through SWOT analysis we saw that the solidest Berkshire strength is the
acquisition of share from well-known businesses like Amazon. Since 1962, when Warren
Buffet saw an opportunity, and acquired Berkshire Hathaway he began to aggressively buy
shares from other companies.

Another good aspect, regarding economies of scale is, the bigger the company, theoretically
the price of its outputs has to decrease, since we saw in the economies of scale´s
commentaries that Berkshire Hathaway had some, and still have some governmental
advantages, some loan bank advantages and so on.

To sum up, the only and effective way in which Berkshire Hathaway can increase its market
share is through the acquisition or increasing the percentage of shares in other businesses,
fact that is proven in the market share commentary, that by doing so, a company achieves
two things:

- It taps into the newly acquired firm's existing customer base

- It reduces the number of firms fighting for a slice of the same market by one.

I believe that Berkshire Hathaway will become a largely global power as e-commerce,
represented by Amazon, begin to assimilate to a globalized culture rather than the separate
cultures of the world. Berkshire Hathaway, through his successfully Warren Buffet value
investments, who has built a company and culture will last long after he is gone, according
to UBS analyst Brian Meredith:

"They're developing all these connections and Warren is super smart, and he knows
how to mentor people, and that's what he's doing right now to put them in that position when
you have a situation, like a financial crisis or whatever, they know, or an investment banker
on Wall Street knows, 'Ah, I can call Todd, or I'll call Ted, or I can call Ajit,' right? Boom,
first call." 9

9
Source: https://finance.yahoo.com/news/berkshire-hathaway-after-warren-buffett-031659031.html
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APPENDICES
SWOT Analysis
Strengths
- Attractive investment
- Strong financial growth
- Large and varied business portfolio
- Major acquisitions
- Strong brand name.
Opportunities
- New Acquisitions
- Investment in emerging economies
- Investing in other famous brands
Share´s Berkshire Hathaway evolution
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Weakness
- Decision making limited to few
individuals
- Acquisition and investment mistakes
- Product Flops and Failures.
Threats
- Regulatory threats
- Competition
- Economic fluctuations
- Traditional risks related to insurance and
investment businesses
SUPPORTING DOCUMENTS
Supporting document 1

https://www.fool.com/investing/2019/08/15/berkshire-hathaway-buying-amazon-stock-should-
you.aspx

Buffett's Berkshire Hathaway Is Buying Amazon Stock.

Should You?
Should investors take advantage of Amazon stock's recent
pullback?
Daniel Sparks

(TMFDanielSparks)

Aug 15, 2019 at 7:41PM

In a regulatory filing published on Wednesday, Warren Buffett's Berkshire

Hathaway (NYSE:BRK-B) (NYSE:BRK-A) revealed an increased stake
in Amazon.com (NASDAQ:AMZN). While the position implies a level of confidence
in the stock's long-term potential, investors should think twice before they jump
the gun and buy Amazon just because Berkshire bought shares.

Nevertheless, Amazon is starting to look undervalued in its own right. Shares have
tumbled over the past 30 days, driven both by a sell-off in the overall stock market
and a disappointing earnings report in late July.

IMAGE SOURCE: AMAZON.COM.

Berkshire clicks the buy button on Amazon stock

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Berkshire started buying stock in the cloud-computing and e-commerce giant in
the first quarter of 2019. The company bought 483,300 shares of Amazon at the
time. But Berkshire owned 537,300 shares as of the end of its second quarter,
according to the holding company's most recent filing with the Securities and
Exchange Commission. This means Berkshire added 54,000 shares to its Amazon
holding.

The company's total stake in Amazon is now worth $957 million as of this writing.

But investors should keep in mind that the new shares weren't likely the Oracle of
Omaha's doing. When Berkshire first revealed its stake in Amazon in May, Buffett
clarified that the purchases were made by one of his two investment lieutenants,
Todd Combs and Ted Weschler, each of whom was managing over $13 billion at
the time. With this stake only increasing by 11% in Q2, these purchases are likely
still too small to be Buffett's.

The Berkshire CEO did admit in an interview with CNBC in May, though, that he has
been "a fan" of the company and had "been an idiot for not buying it" earlier.

Investors should also note that this investment, at less than $1 billion, is small in
comparison to the company's biggest bets on equities. Buffett, for instance, has a
stake in Apple that's worth more than $50 billion. Furthermore, the company has
24 holdings each worth more than $1 billion, with five valued at more than $15
billion each.

Amazon shares are looking attractive

While famed investor Warren Buffett may not be personally clicking the buy button
on Amazon stock, this doesn't mean shares aren't compelling.

The stock is down about 12% over the past 30 days. Part of this decline came when
the company's second-quarter earnings per share missed analyst estimates. Of the
rest of the stock's slide, most has been due to bearishness in the overall market.

Page 11 of 18
 Supporting document 2

https://www.cnbc.com/2019/08/14/warren-buffetts-berkshire-hathaway-raises-amazon-stake-by-
11percent.html

Warren Buffett’s
Berkshire Hathaway
raises Amazon stake by
11%, now worth $947
million
P UB L IS HE D WE D, A U G 1 4 2019 4:25 PM E DT U PD A TE D WE D, A U G 14 2 019 5:15 PM ED T

Kate Rooney @ K R 0 0 N E Y

KEY POINTS
 Warren Buffett’s Berkshire Hathaway revealed an 11% increase in its Amazon stake Wednesday.

 Buffett first announced an investment in Amazon in May, but said he was not the one behind the share
purchases.

 Berkshire also slightly increased its bet on bank shares, which have been hit this month on concerns
about an inverted yield curve hurting profits for the group.

Page 12 of 18
Warren Buffett

Bloomberg | Getty

Warren Buffett’s Berkshire Hathaway has been loading up on shares of Amazon.

Berkshire upped its stake in the e-commerce giant by 11%, the Omaha,
Nebraska-based holding company revealed in a government filing Wednesday.
Berkshire now owns 537,300 shares of Amazon, worth $947 million. The
holdings are as of the end of the second quarter.

Buffett announced his initial Amazon investment in May, but said he was not the
one behind the share purchases.

“One of the fellows in the office that manage money” bought shares of Amazon
on behalf of Berkshire, Buffett told CNBC’s Becky Quick on the eve of the
company’s annual shareholders meeting in Omaha.

Buffett also slightly increased his bet on bank shares, which have been hit this
month on concerns about an inverted yield curve hurting profits for the group.
Berkshire’s Bank of America stake was increased by 3.5% last quarter, according
to the filing. It also raised its holding of US Bancorp by 2.4%. Other big bank
holdings, including Wells Fargo and J.P. Morgan Chase, remained the same.

Page 13 of 18
The famous value investor has historically avoided major technology bets,
ending a rough chapter in IBM last year. But in February 2017, he announced
that Berkshire was buying a large stake in Apple. In the the first quarter of 2018,
Berkshire added 75 million shares of the iPhone maker and told CNBC at the
time that he clearly likes Apple, and “we buy them to hold.”

One of his two lieutenants, Todd Combs or Ted Weschler, who each manage
portfolios of more than $13 billion in equities for Berkshire, is behind the
original Amazon purchase and likely the increase seen last quarter.

The Berkshire chairman and CEO has long admired Amazon founder Jeff Bezos
and is working with him on a joint health care venture. But the legendary
investor has basically said that he missed his chance on Amazon.

Amazon has “far surpassed anything I would have dreamt could have been done.
Because if I really felt it could have been done, I should have bought it,” Buffett
told CNBC in 2018. “I had no idea that it had the potential. I blew it.”

Apparently one of his managers thinks there is still an opportunity for gains still
in the shares, which are 12% in the last month amid a broader market sell-off.

Kraft Heinz, Berkshire’s fourth largest holding, hit a record low last week after
the company announced an additional write-down of $1.22 billion and missed
revenue expectations. Buffett told CNBC in June that he “made a mistake in the
Kraft purchase in terms of paying too much.”

In its last major SEC filing, Berkshire Hathaway disclosed an 18% increase in its
J.P. Morgan Chase stake to 59.5 million shares in its last quarterly filing, and a
22% increase to its Red Hat holdings to 5.1 million shares. Red Hat
was acquired by IBM for $34 billion in July.

Page 14 of 18
Supporting document 3

https://www.nasdaq.com/article/berkshire-hathaways-amazon-investment-is-a-sign-of-the-times-
cm1158127

Berkshire Hathaway's Amazon Investment

is a Sign of the Times
June 03, 2019, 10:56:03 AM EDT By Dr. Richard Smith

Shutterstock photo

On May 2, Warren Buffett revealed that Berkshire Hathaway bought shares of Amazon
(AMZN) as an investment. This is a "spit out your coffee" type moment.
Warren Buffett is, by far, the most renowned and beloved value investor of all time. And
Berkshire Hathaway (BRK-A, BRK-B), Buffett's main investment vehicle since the late 1960s,
is the most well-known and revered value investing conglomerate of all time.

Amazon, meanwhile, has a valuation of roughly 80 times trailing 12-month earnings. Based
on forward-looking analyst estimates for the year 2020, it is trading around 50 times earnings.

Page 15 of 18
During a Q&A session at the annual Berkshire meeting in Omaha, Nebraska, last weekend,
Buffett tried to convince his audience of adoring shareholders that Amazon counts as a value
investment.

If Amazon is a value investment, then the term "value investing" has lost all meaning.

According to Buffett himself, value investing has historically meant buying assets at a
discount to their intrinsic value, or otherwise seeking a margin of safety through factors like a
stable franchise "moat" and predictable cash flows as far as the eye can see.

Amazon may be a legitimately good long-term investment. But it is not a value investment.
There is a reason why growth stocks have a separate category.

Berkshire buying a stake in Amazon is an ideal sign of the times. The world is changing
dramatically at the margins, and Berkshire is changing with it. This is largely happening
because of rapid technological change. By signing on, Berkshire is in effect saying: "If you
can't beat 'em, join 'em."

As a sign of how things are changing, consider that the Nasdaq 100 is on track to outperform
the broader market for the 10th time in 11 years, according to Bloomberg. Meanwhile the only
three companies to have tasted a trillion-dollar market cap are FAANG-style tech stocks:
Microsoft (MSFT), Apple (AAPL) and Amazon.
What's more, Bloomberg now sees "1999-level dominance" in the size of Nasdaq 100 market
caps, which now count for about 36% of the S&P 500. Except there is a big difference
between now and 1999: The earnings of Nasdaq 100 companies today are four times what
they were 20 years ago. The tech giants mostly gush out cash rather than burn it; even
Amazon can turn on the spigots when it feels like it.

At the same time, the old guard value investments Berkshire Hathaway used to favor are
living in terror of seeing their moats eroded, their brands eclipsed or destroyed, and their
long-term edges eaten away by technology-driven competitive change.

That is because the rapid pace of technological advancement is wreaking havoc on the
"moats" of old, with traditional value investments too often becoming "value traps." Berkshire
investing in Amazon is direct confirmation of this sea change.

The technology impacts we are seeing today are deep, tidal trends impacting the very nature
of productivity and how work is done within the U.S. economy. (Speaking of productivity —
U.S. productivity numbers recently hit their highest levels since 2010, another thing you are
"never" supposed to see towards the end of a business cycle. That is technology shifting the
landscape again.)
Page 16 of 18
We are entering a period of history where "growth" feels intrinsically safer than value because
"growth" is about monetizing the future, and in technology terms, the future is kicking down
the door.

Dr. Richard Smith, the founder and CEO of TradeSmith, is a pioneer of behavioral investing
techniques. His company, TradeSmith, is dedicated to empowering individual investors
through the use of intuitive, easy-to-use software tools.
The views and opinions expressed herein are the views and opinions of the author and do
not necessarily reflect those of Nasdaq, Inc.

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1. World wide web

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eyJVcCBWb2x1bWUiOiIjMDBiMDYxIiwiRG93biBWb2x1bWUiOiIjRkYzMzNBIn0sInBhbmVsIj
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ydCJ9fX19
4. London stock exchange
https://www.londonstockexchange.com/traders-and-brokers/private-investors/investing-
in-shares/about-share/investing-share.htm

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