Berkshire B Joining S&P 500

Today is Berkshire Hathaway’s (BRK.B) final trading session before the company’s inclusion in the Standard & Poor’s 500 Index. After the close of trading today, Berkshire’s Class B shares will join the index. The stock price may witness a significant increase later in the day as a result of buying by index funds tracking the S&P 500.

Yesterday, Berkshire Hathaway shares had moved up significantly. Late in January, Standard and Poor’s (S&P) announced that it will be adding Berkshire Hathaway replacing Burlington Northern Santa Fe Corp. (BNI: 100.21 -0.02 -0.02%) in its S&P 500 index. This move by S&P comes after Berkshire last week announced a 50-for-1 split of its Class B shares in connection with the conglomerate’s takeover of Burlington Northern.

For Berkshire, the acquisition of Burlington Northern, in which it had already owned 22.6%, will be its biggest to date. With this acquisition, Berkshire is adding a railroad transportation business to its already wide scope of manufacturing, retail, insurance and utility businesses. Valued at $34 billion, the acquisition is scheduled to officially close today.

Warren Buffett, the CEO of Berkshire Hathaway, has until now never considered splitting Berkshire stock. This reflects management’s desire to attract long-term investors as opposed to short-term speculators.

However, this share-split action is intended to compensate the small shareholders of Burlington Northern. Since the Class A shares (BRK.A) are too high priced, it would be difficult to use these to compensate the low-value shareholders in the acquired company. However, the split of the shares into the high-priced Class A and the lower-priced Class B will provide appropriate currencies for compensating both categories.

Thus shareholders who do not hold a high value of stock but opt for exchange may now be compensated with only Class B shares. The majority of the shares issued in the $100-per-share deal will, however, be Class A shares.
 
The share split-off and its eventual inclusion in the S&P 500 index will attract smaller investors to buy into the once prohibitively high-priced stock, boosting its demand and thereby increasing liquidity. On the negative side, it might also attract such investors that Buffett was apprehensive about.

The S&P 500 is a free-float capitalization-weighted index since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. It is composed of companies representative of the industries in the United States economy. Though Berkshire Hathaway had a market capitalization larger than a vast majority of members of the S&P 500, it had to date been excluded due to its over $100,000 per share price, rendering the stock “illiquid,” or difficult to trade.