Berkshire Hathaway Inc. (BRK.B) is fighting for energy producer Oncor, but keep in mind it does have about $100 billion in cash to spend.
Buffett is clear on his acquisition criteria: large, simple businesses, with strong management in place, generating consistent earnings with little to no debt. While $11.3 billion is no small sum, it pales in comparison to other Berkshire deals, including its last major one before Oncor, in which Berkshire paid $37.2 billion for Precision Castparts Corp., or the $143 billion attempt earlier this year by Berkshire-backed Kraft Heinz Co. (KHC) to buy Unilever NV (UL) .
Using Buffett's acquisition criteria, FactSet Research Systems Inc. (FDS) M&A director Bryan Adams set out to identify potential targets those businesses that share these characteristics:
- businesses with primary revenue exposure to the United States
- earnings from $33 billion to $133 billion
- business that have maintained, for three years: a price/earnings ratio of at least 15, a return on equity of at least 3%, and a debt-to-equity ratio of no more than 33%
- businesses with no more than five subindustries
- businesses with managers possessing an average tenure of five years
- and finally, businesses worth $25 billion to $200 billion.
Berkshire itself does not even fit the bill, Adams noted, with 23 subindustries and a debt-to-equity ratio of 36%.
From the universe of 83,000 public companies, Adams came up with 12. Due to their expensive stocks, he excluded pharmaceutical company Actelion Ltd. (ALIOY) , broker Charles Schwab Corp. (SCHW) , medical robot maker Intuitive Surgical Inc. (ISRG) and tech company VMware Inc. (VMW) . That leaves just eight companies.
"This is definitely a well-worn game, and we will almost certainly be wrong, but games are meant to be fun!" Adams wrote. "If the game analogy doesn't work for you because winning is everything, then let's treat this as a poor man's thought experiment instead."
Here's the eight companies that fulfill all of Berkshire's acquisition criteria, according to Adams' analysis.
Adidas AG (ADDYY)
Industry: Apparel/footwear
Market value: $40 billion
Pretax income: $1.6 billion
Average management tenure: 12.2 years
Debt/equity: 25.1
3-year average P/E: 26.5
3-year average ROE: 13.4
Sub-industries: 4
BlackRock Inc. (BLK)
Industry: Investment managers
Market value: $68.3 billion
Pretax income: $4.5 billion
Average management tenure: 9.3 years
Debt/equity: 16.9
3-year average P/E: 18.6
3-year average ROE: 11.6
Sub-industries: 5
Cognizant Technology Solutions Corp. (CTSH)
Industry: Information technology services
Market value: $39.1 billion
Pretax income: $2.4 billion
Average management tenure: 14.5 years
Debt/equity: 8.2
3-year average P/E: 23.0
3-year average ROE: 19.4
Sub-industries: 2
Henkel AG & Co. KGaA (HENKY)
Industry: Household/personal care
Market value: $55.9 billion
Pretax income: $3.0 billion
Average management tenure: 16.4 years
Debt/equity: 24.8
3-year average P/E: 20.8
3-year average ROE: 15.3
Sub-industries: 5
L'Oréal SA (LRLCY)
Industry: Household/personal care
Market value: $116.3 billion
Pretax income: $4.8 billion
Average management tenure: 21.7 years
Debt/equity: 5.2
3-year average P/E: 24.9
3-year average ROE: 13.5
Sub-industries: 5
Nike Inc. (NKE)
Industry: Apparel/footwear
Market value: $97.6 billion
Pretax income: $4.9 billion
Average management tenure: 15.3 years
Debt/equity: 30.6
3-year average P/E: 25.0
3-year average ROE: 29.2
Sub-industries: 4
Public Storage (PSA)
Industry: Real estate investment trusts
Market value: $36.3 billion
Pretax income: $1.5 billion
Average management tenure: 14.1 years
Debt/equity: 4.2
3-year average P/E: 34.9
3-year average ROE: 13.6
Sub-industries: 2
