Berkshire Hathaway Inc. (BRK.A) (BRK.B) has entered 2018 with more than $100 billion in cash on hand, mainly in treasuries, Chief Executive Warren Buffett said on Tuesday, meaning the Oracle of Omaha has about $80 billion for acquisitions.
"Net, we're buying," Buffett said on CNBC. "We're basically buyers over time. There could be conditions under which we're sellers. For one thing, the money keeps coming so we basically keep buying," he continued.
The Omaha, Neb.-based company with a market capitalization of about $510 billion is a collection of businesses that range from food to insurance, manufacturing and utilities.
"The businesses benefit from best-in-class managements, unmatched balance sheet strength, and many of the companies have strong brands, scale or low-cost competitive advantages," J.P. Morgan analyst Sarah DeWitt wrote in a Dec. 15, 2017 research note.
The Berkshire chairman appears interested in investment opportunities, particularly bolt-on acquisitions, Edward Jones analyst Jim Shanahan told TheStreet. A bolt-on acquisition refers to the purchase of a company that merges into a division of the acquiring entity.
Electronic components distributor TTI Inc., a subsidiary of Berkshire Hathaway, made a bolt-on acquisition just before the new year, buying South Korean semiconductors supplier Changnam INT Ltd. for an undisclosed sum. The purchase allows TTI to expand its presence in the South Korean market.
Over the last 12 months, Berkshire made 27 transactions, according to FactSet Research Systems Inc. Some of the transactions included the purchase of a 38.6% minority stake in Pilot Travel Centers LLC, owner of the Pilot Flying J truck stop chain; Berkshire subsidiary Marmon Engineered Components Co. acquired PRISM Plastics, which manufactures injection molded plastic components, for an undisclosed sum; and, Clayton Homes Inc., another Berkshire subsidiary, acquired Harris Doyle Homes Inc. for an unknown price.
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Berkshire has laid out six criteria for acquiring a business. It must be a large purchase, at least $50 million of before-tax earnings. The company must have demonstrated consistent earning power and have businesses earning good returns on equity while employing little or no debt. It also must be a simple business -- Buffett noted that "if there's lots of technology, we won't understand it" -- and management must be in place. Lastly, there has to be an offering price. Berkshire said it will not engage in unfriendly takeovers.
"If Berkshire is able to acquire a large business in an all-cash deal, we would typically expect a transaction to be immediately accretive to Berkshire's [earnings per share]," Barclays' Gelb said.
Using Berkshire's acquisition criteria, Bryan Adams, director of FactSet M&A, screened for companies that could be likely acquisition targets, even though attempting to read the mind of an Oracle can be a dubious task.
In July 2017, Adams identified eight companies that meet Buffett's standards, including L'Oreal SA (LRLCY) which has been identified by The Deal as a takeover target.
The other acquisition targets Adams mentioned were Adidas AG (ADDYY) , BlackRock Inc. (BLK) , Cognizant Technology Solutions Corp. (CTSH) , Henkel AG & Co. (HENKY) , Nike Inc. (NKE) , Public Storage (PSA) and SAP SE (SAPGF) -- none of which The Deal has identified as M&A targets.
Actelion Ltd. was on Adams' initial 12-company list but eliminated because it was too expensive on a relative basis as were Charles Schwab Corp. (SCHW) Intuitive Surgical Inc. (ISRG) and VMware Inc. (VMW) , he said. Notably, Actelion was acquired by Johnson & Johnson (JNJ) in a $30 billion all-cash deal.
For the time being, however, Buffett told CNBC that he doesn't have his sights set on any particular acquisition.
But whenever Buffett decides to step away as CEO of Berkshire, the new CEO may begin selling, instead of buying.
"Upon Buffett's departure, the new CEO would be very likely to consider divestment of non-core, relatively unprofitable or underperforming portfolio companies," said Shanahan.
For example, McLane Co., a wholesale distributor of groceries and other items, generates close to $20 billion in annual revenues, but its earnings of about $500 million are negligible, Shanahan added.
To be sure, Buffett has not indicated that he's leaving imminently as the Oracle noted that he is in "remarkably good health."