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Cloning of Class B

📈 The Situation

In early 1996, several financial "promoters" identified a market opportunity: Berkshire Hathaway's Class A stock was priced too high for small investors. These promoters planned to create unit investment trusts (UITs) that would:

  1. Buy Class A shares.
  2. Market fractional units of those shares to retail investors.
  3. Charge high fees, sales commissions, and ongoing expenses.

🛡️ The Defensive Response (The "Clone")

Buffett viewed these trusts as "parsite-like" entities that would exploit small investors and Berkshire's reputation.

To "clone" the stock and provide a better alternative, Berkshire initiated its own secondary share class in May 1996:

  • The Vehicle: Class B Shares (affectionately called "Baby Berkshires").
  • The Value Prop: By issuing the shares directly, Berkshire ensured that small investors could buy into the company without the high fees and commissions of the unit trusts.
  • Preemption: The issuance effectively killed the market for the unit trusts, as no rational investor would pay a middleman for a synthetic version of something they could buy directly for less.

🧠 Strategic Logic

  • Self-Selection: Buffett wanted to ensure that even small-scale shareholders shared the same long-term philosophy as Class A owners.
  • Anti-Speculation: He set the sales commissions extremely low and issued a blunt warning in the 1996 Letter that he would not buy the stock at its current price, discouraging speculators from driving the price to irrational levels.
  • Conversion Rights: To prevent a market imbalance, Class A shares were made convertible at any time into Class B shares (1:30), but not vice versa.

🗣️ Reference from the 1996 Letter

"Our 'cloning' of Berkshire... was a tactical response to the threatened creation of unit investment trusts... These trusts would have been marketed by people interested in their own welfare, rather than that of the investors. We decided to offer a better product directly."