Buffett's buy changes Berkshire rules

December 12, 2012: 12:28 PM ET

Berkshire Hathaway buys $1.2 billion of its own shares at a price higher than what CEO Warren Buffett has said he'd pay.

By Carol J. Loomis

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Warren Buffett

FORTUNE -- Berkshire Hathaway bought an "elephant" Wednesday, and the price of the company's A stock jumped by 2.5% to $134,200 as the market applauded the news.

This elephant was a different breed from the corporate kind chairman and CEO Warren Buffett has been stalking. Instead, Berkshire announced that it bought $1.2 billion of its own stock from the estate of a long-time shareholder.

This is by far the largest amount of its own stock the company has ever bought.

The price, too -- $131,000 per Class A share -- was a mindbender. It is about 118% of Berkshire's book value at the end of the third quarter and a slightly lower percentage of what book value can be estimated to have grown to by now. So perhaps $131,000 is 115% of what book value per share now is.

What's startling about even 115% is that Berkshire had made a new offer in September 2011 to buy its own stock at prices up to 110% of book value -- but no higher.

What appears to have changed? Berkshire (BRKA) stock owned by a large estate came up for sale, and Buffett decided the chance to buy a huge chunk of stock -- 9,200 Class A shares -- was worth the price. The seller, meanwhile, probably decided a one-lump sale was superior to dribbling stock into the market.

MORE: The wit and wisdom of Warren Buffett

Berkshire did not announce the identity of the estate. There will be speculation about who it was, of course, but there are so many under-the-radar holders of big amounts of Berkshire stock that the quest will not be easy.

Berkshire said in its announcement that, besides buying this block of stock, it was simultaneously raising its limits on the price it would pay for its own shares to 120% of book value.

Today's moves will please the many Berkshire shareholders who believe the company's stock is undervalued and have wanted Buffett to pay up. Questions about why he doesn't buy more aggressively are a perennial at Berkshire's annual meeting.

The Buffett book that Fortune and I have just released, Tap Dancing To Work, gives the history of Berkshire's buying in its own stock. Buffett said on an occasion in 1999 that he had sometimes "erred" in not buying in stock and has also said that a decision to buy is likely to be self-defeating. That is, his mere announcement that Berkshire would buy has the effect of sending the stock up -- to a price that exceeds what Berkshire would pay.

That was indeed the effect of Berkshire's announcement in September 2011 that it would buy stock up to 110% of the company's book value. The company's share price immediately jumped.  In the next year Berkshire succeeded in buying only $67 million of stock.

That amount is obviously dwarfed by the $1.2 billion purchase announced Wednesday.

The writer of this article, Fortune senior editor-at-large Carol Loomis, is a longtime friend of Warren Buffett's and also a longtime Berkshire Hathaway shareholder.

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