Buffett Fires Elephant Gun

NEW YORK (TheStreet) - On Monday, business newswires buzzed with reports that the world famous investor, Warren Buffett, had agreed to purchase Lubrizol (LZ), a chemical company.

Under the deal, Buffett's Berkshire Hathaway ( BRK.A.) will purchase all outstanding shares of Lubrizol for $135 per share in a the deal valued at $9.7 billion, one of the firm's largest acquisitions.

This move is a welcomed relief for Buffett fans who have been closely monitoring the multi-billionaire's inflating pile of cash. In the period following his record-breaking purchase of Burlington Northern Santa Fe Railroad, Berkshire has seen little action on the M&A front, leading many to ponder what Buffett had in store for his legendary firm.

Historically, Buffett has not been a fan of large cash positions. In a recent article, I noted that, during an interview with Charlie Rose, he likened cash to oxygen, explaining that it is important to have around but unnecessary to have in excessive amounts.

In regards to Berkshire Hathaway, he insists that his company always has necessary reserves on hand but does not view cash as a good long-term investment.

Despite his views, finding attractive places to spend his cash has become increasingly difficult over the years. Due to Berkshire's size, Buffett can no longer expect to see the same staggering returns by investing in small, fast-moving companies. Rather, the investor must now refocus his attention on larger, more stable firms to find returns. This results in a far smaller pool of potential targets.

In late February, Buffett noted in his annual letter to Berkshire Hathaway shareholders that his elephant gun is reloaded and his trigger finger for acquisitions is itchy. However with no attractive deals available the investor has been forced to sit on the sidelines and watch his pile of cash grow. As of the close of 2010, the firm had close to $40 billion in cash on hand.

In commenting on the Lubrizol deal, Buffett pointed out that the firm represents a perfect example of a Berkshire Hathaway target. According to Bloomberg, the firm ranks as the world's largest producer of lubricant additives that are used extensively in a number of industries including transportation, healthcare, and consumer goods -- sectors in which Buffett has traditionally shown interest.

Additionally, the Oracle of Omaha commended the company's CEO James Hambrick. As with past deals, little about Lubrizol is expected to change as a result of this deal, although the firm will now be listed as a subsidiary of Berkshire Hathawa. It management will remain intact and it will stay based in Ohio.

The transaction is expected to be completed in the third quarter of this year.

Although the positions are minor, it is possible to gain access to Lubrizol through a number of exchange traded funds and mutual funds.

The Fidelity Select Chemicals Portfolio ( FSCHX) and the iShares Dow Jones U.S. Basic Materials Sector Index Fund ( IYM) are two products which boast exposure to the firm. Shares of LZ account for 1.3% and 1.4% of the funds respectively.

In the coming weeks and months, it will be interesting to see what more Warren Buffett has to say about this new purchase.

Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management owned Fidelity Select Chemicals Portfolio.

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