By Jonathan Stempel and Jennifer Ablan
(Reuters) - Warren Buffett may be on safari for major acquisitions, which he likes to call elephants, but shareholders may wonder if his Berkshire Hathaway Inc has become the biggest elephant in the room.
Berkshire has grown to look more and more like corporate America, as Buffett expands outside its core insurance business into such areas as energy, industrial products, newspapers, and in February ketchup, when he teamed up with Brazil's 3G Capital investment firm to buy H.J. Heinz Co for $23.2 billion.
Few of the 35,000 or more people who will this weekend make a pilgrimage to Berkshire's hometown of Omaha, Nebraska for the company's annual shareholder weekend, which Buffett calls "Woodstock for Capitalists," are likely to criticize that strategy.
While Buffett has managed to handily beat the Standard & Poor's 500 so far this year, outperforming the overall market is getting tougher for Berkshire as it grows and diversifies, investors and analysts said.
Buffett, 82, and Vice Chairman Charlie Munger, 89, will at Saturday's annual meeting field five hours of questions about the company, governance, the economy and - with a $15 billion cash cushion even after the Heinz purchase is completed - their next elephant.
"Larger deals are needed to move the needle," said Doug Kass, founder of hedge fund Seabreeze Partners Management Inc, who has shorted Berkshire stock partly because its size, including a $262 billion market value, makes it more difficult to record market-beating returns.
Kass has been tapped by Buffett as a "credentialed bear" to ask questions and "spice up" the meeting.
Buffett himself recognized the performance question when he noted in his March shareholder letter that Berkshire has lagged the broader market since the latter bottomed out four years ago.
"To date, we've never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch," he wrote. "If the market continues to advance in 2013, our streak of five-year wins will end."
Some investors will also ask how long a man of Buffett's age, even one who recently beat prostate cancer, can remain at the helm of the company he has led since 1965.
"There is nothing the board can do to halt the aging of the CEO, but it has no higher priority than to prepare for succession," said Thomas Russo, a partner at Gardner, Russo & Gardner in Lancaster, Pennsylvania, which invests 11 percent of its more than $6 billion of assets in Berkshire.
Kass also said the company will have to face up to the difficulty of replacing "the single greatest stock investor of all time" probably sooner rather than later.
Buffett is the world's fourth-richest person and owns 21.4 percent of Berkshire, whose board includes Bill Gates, the Microsoft co-founder and the world's second-richest person.
Berkshire has more than 80 subsidiaries selling such things as Russell athletic apparel, Geico car insurance, chemicals and furniture. It owns the Burlington Northern Santa Fe railroad and dozens of newspapers, including the Omaha World-Herald. It will report first-quarter results for those businesses on Friday.
The company also ended last year with $87.7 billion of common stocks, including nearly half in just three companies: Coca-Cola, IBM and Wells Fargo.
But the Heinz purchase will add to the roughly two-thirds of operating profit already generated by businesses outside insurance. Such sprawl has made it harder for the company's stock, which does not throw off dividends, to outperform.
Indeed, it was not until February that the share price of Berkshire surpassed the record it had set more than five years earlier, in December 2007. The S&P 500 returned about 15.4 percent over that time, including dividends.
Through Monday, Berkshire stock is up 19.1 percent this year, compared with an 11.7 percent rise for the index.
James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, which invests 22 percent of its $400 million of assets in Berkshire, said the company's businesses remain appealing.
"If Buffett dies tonight, nothing changes in those businesses," said Armstrong, who said he is attending his 22nd straight annual meeting. "Earnings power has grown enormously, and stock prices often don't track that power in the short run."
Buffett measures performance by dividing shareholder equity, equal to assets minus liabilities, by the number of shares, creating book value per share. By this measure, Berkshire has trounced the S&P 500 including dividends over the long haul.
However, book value is less relevant than the stock price for shareholders trying to realize the value of Berkshire shares by selling them.
And while Berkshire's stock is less than half as volatile as the S&P 500, the similarity is growing.
About 60 percent of the movement in Berkshire's stock could be explained by movement in the S&P 500 in the year ended March 31, up from less than one-fourth over five- and 10-year periods, according to Morningstar Inc.
GOING LONG ON SHORTS
Berkshire plans after Buffett leaves to split his role in three, with his son, Howard, serving as non-executive chairman and one or more others serving as chief investment officer.
The latter could include Todd Combs and Ted Weschler, who each manage some of Berkshire's investments.
Berkshire's board has also chosen an internal manager, not named publicly, as chief executive. Previously, Buffett has said that he would like his successor young enough to serve for 15 years.
Investors now believe this person could be insurance chief Ajit Jain, Burlington Northern railroad chief Matthew Rose, MidAmerican Energy chief Greg Abel, or perhaps even Weschler.
Buffett and Munger will take questions at the meeting from shareholders, three journalists, two industry analysts and Kass.
Events are also scheduled throughout the weekend in Omaha's largest annual tourism event other than baseball's College World Series.
Shareholders can get discounts at Berkshire-owned businesses on everything from See's candies to Brooks running shoes.
For just $5, the sartorially inclined can splurge for a pair of unisex boxer shorts from Berkshire's Fruit of the Loom, emblazoned with a cartoon of Buffett and Munger.
(Reporting by Jennifer Ablan and Jonathan Stempel in New York; Editing by Martin Howell and Leslie Gevirtz)