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Buffett's Newest 'Purchase'

 October 06, 2009 02:31 PM

In this article, we're digging into a new section of Morningstar Opportunistic Investor's repertoire: initial public offerings (IPOs). While investors often get overly excited about these things, IPOs can sometimes be a fertile hunting ground because of the limited operational data available, minimal analyst coverage, and perceived exogenous risks. A legendary example in this vein was MasterCard (MA), which went public at $40 a share because investors didn't understand the company and were afraid of potential anti-trust lawsuits. We don't claim to have found another MasterCard, but this upcoming offering is definitely intriguing.

Let's get started. On Oct. 6, insurance data provider Verisk Analytics is expected to come to market in one of the largest IPOs of the year, and there are some interesting technical aspects of the deal that have us excited. Verisk is primarily owned by property and casualty (P&C) insurance firms such as AIG (AIG), Berkshire Hathaway (BRK.B), Hartford Financial (HIG), Swiss Re, and so on. These firms were hit hard by the financial crisis as their investment portfolios took a beating. Also, underwriting losses were large in 2008 due to the damage caused by hurricanes Ike and Gustav.

Verisk will not be raising any "new" capital in its IPO. Rather, a 30-plus lot of its insurance-company owners and some employees will be cashing out. In some respects, these insurers are "forced sellers"--the IPO proceeds will help repair their balance sheets. If these sellers are willing to take a lower price to get some much-needed capital, we are happy to accommodate them. Interestingly enough, Berkshire is the only stakeholder not selling shares. By not selling, Berkshire is increasing its ownership stake from 5% to nearly 11%. While Buffett's lack of action is not the same as if he were participating in the IPO, we're still intrigued because it represents a vote of confidence for the business.

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