Buffett's Hunt for Big Purchases Fails -- WSJ
February 22 2019 - 3:02AM
Dow Jones News
By Nicole Friedman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (February 22, 2019).
Warren Buffett is always on the hunt for "elephants," as he
calls large acquisitions. But three years have passed since he
bagged a new one.
One reason: The Omaha, Neb., billionaire faces unprecedented
competition from private equity and other funds looking to make
fast acquisitions, often at higher prices than Mr. Buffett is
willing to pay. His last major deal, the $32 billion purchase of
aerospace manufacturer Precision Castparts Corp., closed in January
2016.
His competitors -- global fund managers -- had a record $2.1
trillion in private capital ready to deploy as of June 30,
according to data from Preqin. That is roughly double the amount
they had a decade earlier. Mr. Buffett's Berkshire Hathaway Inc.,
meanwhile, had $103.6 billion in cash as of Sept. 30, the fifth
straight quarter those holdings exceeded $100 billion.
"With rates low and private equity folks drunk with cash and
money all over the place, it's just naturally going to be harder"
for Berkshire to find acquisitions, said Bill Smead, chief
executive of Smead Capital Management Inc., which holds Berkshire
shares.
On Saturday investors are hoping for new hints on Berkshire's
plans to spend its cash, including whether the company will
increase buybacks, in Mr. Buffett's annual letter to Berkshire
shareholders. Berkshire is also expected to release its annual
results.
Mr. Buffett's letters are widely read on Wall Street and beyond
for his insights on investing, economics and other topics. In last
year's letter, Mr. Buffett complained about the difficulty of
finding attractive deals. "Prices for decent, but far from
spectacular, businesses hit an all-time high" in 2017, Mr. Buffett
wrote. "Indeed, price seemed almost irrelevant to an army of
optimistic purchasers."
Berkshire faces more pressure to spend ever-larger amounts on
acquisitions to move the needle on its earnings. Berkshire's stock
hasn't notably outperformed the S&P 500's average return,
including dividends, in the past decade.
This isn't the first time Mr. Buffett has backed away from
making deals because values were too high. In 1969, Mr. Buffett
decided to close his private investing partnership because he
couldn't find appealing investment opportunities, he has said. In
the late 1990s he avoided investments in technology companies, as
values of dot-com companies soared. He then sat out another boom in
the mid-2000s.
"There's no doubt about it that there is far more money looking
at deals now than five years ago, and they're willing to pay out
more for the good, but mundane, businesses that we've been
successful at buying in the past," he said at Berkshire's annual
meeting in 2005.
Those decisions largely paid off for Berkshire during subsequent
market declines and recessions. During the 2008 financial crisis
Berkshire was able to offer lifelines to blue-chip companies,
including Goldman Sachs Group Inc. and General Electric Co.
Berkshire ultimately earned more than $10 billion on its
financial-crisis era investments.
But the size of purchases decreased following Berkshire's
Precision Castparts deal in 2016. Its biggest deal since was the
purchase of nearly 40% of truck-stop company Pilot Flying J for
$2.8 billion in 2017. Berkshire will acquire another 41% of the
company in 2023. Berkshire also bought a medical malpractice
insurer for $2.5 billion last year.
While he waits for deals, Mr. Buffett has plowed some of
Berkshire's cash into equity investments, including building a $39
billion stake in Apple Inc. as of Dec. 31.
Mr. Buffett also has lieutenants helping him find investment
opportunities. Berkshire promoted two executives, Greg Abel and
Ajit Jain, to vice chairmen in 2018, and they are now responsible
for overseeing many of Berkshire's day-to-day business operations.
Berkshire also has two portfolio managers, Ted Weschler and Todd
Combs, who manage part of Berkshire's investment portfolio.
Mr. Combs was instrumental in arranging the Precision Castparts
deal and initiated two investments in financial-technology firms
last year.
Some investors are hoping that Mr. Buffett's patience pays off
again.
"Next time the market drops 30% to 40% and stays there, they'll
have plenty of deals to do," said Henry Asher, president of The
Northstar Group Inc. Berkshire is Northstar's top holding.
Write to Nicole Friedman at nicole.friedman@wsj.com
(END) Dow Jones Newswires
February 22, 2019 02:47 ET (07:47 GMT)
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