Warren E. Buffett, the world's second-richest man, said yesterday that he will buy the 49 percent of Chevy Chase-based Geico Corp. he does not already control, giving his Berkshire Hathaway Corp. full ownership of one of only eight Fortune 500 companies headquartered in Maryland.
Geico stock jumped $12.875 to close at $68.625 yesterday after Berkshire Hathaway offered to pay $70 for each Geico share, an offer that will cost $2.3 billion. The deal is scheduled to close in January, after approval by Geico shareholders and state insurance regulators.
Mr. Buffett has used his 40.7 percent stake in Berkshire Hathaway as a platform to make big bets on a wide spectrum of companies anchored by such names as American Express, Coca Cola Co., Wells Fargo Bank, Gillette and Capital Cities/ABC. He has built a fortune estimated by Forbes magazine last month at )) $10.7 billion.
Geico is another of the core companies upon which Mr. Buffett has built his empire. He first invested in the underwriter of low-cost auto insurance in 1951, when he was 20. Before yesterday's deal, he owned 51 percent of the company, which he bought over the years at an average cost of only $1.33 a share.
Berkshire Hathaway's paper profit on Geico shares it already owns almost equals the $2.3 billion it will pay for the rest of Geico, on an investment of about $47 million.
"He was buying Geico at $2 a share," said Robert Hagstrom, a former Legg Mason Inc. stockbroker and author of "The Warren Buffett Way: Investment Strategies of the World's Greatest Investor," which quickly reached best-seller lists after it was published last fall. "Geico has been probably one of his greatest successes."
Though Geico is to become a subsidiary of Berkshire Hathaway, the company said the impact on Maryland will be slight. Mr. Buffett will keep Geico's longtime management team, which is led by co-chief executives Louis A. Simpson and Olza M. Nicely, and no major staff reductions are expected as part of the merger.
"There really won't be any changes," Mr. Buffett said. "I can literally say there won't be one person's job that is either eliminated or changed or anything else."
Mr. Buffett added that the company's "physical and mental headquarters" will remain in Maryland, rather than be supplanted by decision-makers in Nebraska, where Berkshire Hathaway is based.
David L. Anderson, Geico investor relations director, said the buyout is also not expected to create any major changes for policyholders. Geico has about 1,500 employees and 250,000 policyholders in Maryland. Most of Geico's policies insure automobiles; it has announced plans to exit the homeowners' insurance business. It earned $207.8 million last year on $2.64 billion in revenue.
Mr. Buffett's fame is based on his success in identifying undervalued companies that later enjoy phenomenal long-term growth. Chief executives of companies in which he has invested credit that growth in large part to the 64-year-old Mr. Buffett's combination of sage advice and hands-off policy.
Mr. Buffett's "value investing" approach stands in sharp contrast to the "growth" investment strategy, which calls for investing in high-flying stocks in expectation that the companies will exceed even high expectations. Microsoft Corp., whose chairman Bill Gates is the only man richer than Mr. Buffett, and Wal-Mart Stores Inc. are two of the most spectacular growth-stock payoffs in recent U.S. history.
By contrast, several of Mr. Buffett's biggest scores, including Geico, have come when he has been willing to try to save companies after a major scandal or a series of management mistakes.
In more recent years, Mr. Buffett has stumbled in white-knight investments in Salomon Inc., the investment firm, and USAir. In March, Berkshire Hathaway wrote off $268.5 million of its $358 million investment in the airline and Mr. Buffett left USAir's board.
But in 1976, he was the biggest buyer of a $75 million emergency stock offering that Geico cobbled together after a combination of high inflation and overzealous pursuit of auto insurance customers who turned out to be poor risks produced big losses that also led to the resignation of Geico's then-chief executive. The executive later settled with the Securities and Exchange Commission, resolving accusations that he had dumped his Geico shares before news of pending losses became public.
"We were aggressively writing new business and we let our standards slip," Mr. Anderson said. "It was a one-two punch that nearly put us out of business."
In the years since, Geico has become known as an extremely picky underwriter, undercutting competitors for the business of drivers with clean records but demanding far higher premiums from customers who have had even one driving violation. It also has among the lowest administrative costs in the insurance business because it sells most policies over the phone without using insurance agents.
"That's what has made them successful," said Carol Manning, who follows Geico for Prudential Securities Inc. in New York. "Geico has one of the highest valuations in the insurance industry."
About the only quibble Prudential has had with Geico is that its stock was expensive, compared to the company's earnings, before the deal. But Ms. Manning and Mr. Buffett said the higher price Berkshire is paying for the rest of the stock will not force major changes.
Headquarters: Chevy Chase
Chief executives: Olza M. Nicely and Louis A. Simpson
Employees: 8,000 (1,500 in Maryland)
1994 revenues: $2.7 billion
1994 net premiums: $2.5 billion
1994 earnings: $207.8 million
Policyholders: 2.5 million