Berkshire Hathaway Potential Acquisitions

Berkshire Hathaway Potential Acquisitions

Buffett made a few comments over the weekend that I thought were significant.

Warren Buffett, who built Berkshire Hathaway Inc. (BRK/A) with stock picks before focusing on takeovers, said he recently opted against a $22 billion acquisition because he didn’t want to sell investments in marketable securities. (Article here)

and

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is adding to its shareholdings of two U.S. companies amid a market dip, billionaire investor Warren Buffett said on Monday. (Article here)

and

Mr. Buffett said he and Mr. Munger “have nothing against” commercial insurance and pointed out that they’ve expanded in the medical malpractice field. “If we could find a quality company in commercial lines… we would buy it in an instant,” he said.

Another analyst question prompted Buffett to discuss how he values Berkshire’s non-insurance operations. Rubalcava was excited by the answer, in which Buffett said he’d look to buy similar businesses for nine to 10 times earnings. (Article here)

1) On the first point, he does not want to sell marketable securities is quite a statement.  It means he expects more return off of public securities than whatever the target might have been.   Given that he would only be liquidating $5 billion of securities to maintain the $20 billion buffer, it either could not have been that good of a deal, or Buffett has a high view of his current public securities portfolio.

But I sat down and thought about what Buffett might have wanted to acquire.  It could have been a private company; I have no data on that.  What if it were a public company and one with a low P/E and decent prospects, what could it be?

Well, the current market cap would have to be between $15-20 Billion, and so I came up with the following tickers:

PPG Industries, Inc. (NYSE:PPG) APD NOC RTN VFC BRFS PSX DFS AON ALL CME TMO BDX RCI TU PSO RUK WM ETN AEP

There are some with large moats: PPG Industries, Inc. (NYSE:PPG), APD, NOC, RTN (Chemcials and Defense) AON, CME unique businesses, hard to challenge.  Other moats: VFC, TMO, BDX, RCI, TU, PSO, RUK, WM, ETN

Pipelines, which fit into other Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) subs: Phillips 66 (NYSE:PSX)

Free cash flow generators: Phillips 66 (NYSE:PSX) and DFS

Cheap providers of float: The Allstate Corporation (NYSE:ALL)  (Of course there would be issues merging Allstate and GEICO, if you merge them at all.  You could keep both systems whole, you could sell off Allstate’s Life companies, or you could merge them into existing BRK insurance subs.  Me?  I would sell the life subs,  and analyze whether having an agency force had value.  My guess would be no, and I would spread the Allstate inforce block onto the current GEICO support system after a year or two.)

Adds to the utility portfolio: American Electric Power Company, Inc. (NYSE:AEP)

I’m not saying Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) should buy any of these companies, but they seem to be reasonable possibilities for BRK to buy.

2) So BRK is buying two companies that they already own.  What could they be?  My two best guesses are General Dynamics [GD] and DirectTV [DTV].   BRK bought them in the last reported quarter and the price hasn’t moved much.  Other possibilities include: WFC, SNY BK, INTC, USB, CVS, IBM, DVA, V, VRSK, and LMCA.

3) If BRK really wants to get into commercial insurance at a cheap price there is an easy choice — ACE Limited (NYSE:ACE).  Low P/E, P/B, reasonable reserving.  Yes, it is in Bermuda, but that offers BRK other ways to lower its tax bill, which Warren Buffett aggressively pursues.  He never pays a dime more than he has to!

-=-=-=-==-=-=-=-=-=-=-=–=-==-=-=-

These are just my musings, don’t give them more emphasis than that.  Buffett offers a few crumbs at his buffet, and I make an effort to offer ideas consistent with what little he said.  I am very likely to be wrong, but I like a lot of the ideas here.

Full disclosure: long AEP & INTC for myself and clients

By Daivd Merkel, CFA of alephblog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.