What Buffett Might Buy
The sage of Omaha most likely wants a large, well-run company to add to Berkshire's eclectic mix. Here are some possible acquisitions
by Pallavi Gogoi
Warren Buffett, the world's most astute investor, is sitting on piles of cash. Now, from his company's annual meeting in Omaha, he says that he's willing to put down $40 billion to make an acquisition and that he could spend as much as $60 billion. The target could be added to the eclectic mix of companies that he has bought over the years at Berkshire Hathaway (BRKA), including underwear maker Fruit of the Loom and auto insurer Geico.
Trouble is, Buffett has been struggling for years to find ways to spend his cash on companies that fit his investing ethos. Buffett is famously frugal in his personal life and in his corporate purchases. With competition from private equity firms and other aggressive buyers, it's tough to get companies for bargain prices these days.
A Mega-Deal of Buffett Proportions
If Buffett is intent on finding a mega-deal, what kind of target is most likely? For starters, the sage favors high-quality businesses with long-term competitive advantages, what he describes as "a moat" that keeps rivals at a safe distance. He shies away from businesses he doesn't understand, such as technology. Perhaps most important, Buffett is looking for a well-run company with a solid management team that he doesn't have to go in and replace. And he's not chasing after a quick buck. Once he buys a company, he wants to hold on for the long haul, unlike most private equity firms.
Buffett has long invested almost all his money in the U.S., but he's now searching more actively on foreign shores. Last year he paid $4 billion to buy control of Israel's Iscar Metalworking, a cutting tools company that was founded in 1952 by a German-born immigrant Eitan Wertheimer (see BusinessWeek.com, 5/8/06, "Buffett Takes a Cut of Iscar"). Now, there's speculation that he might buy a handful of large, well-run international companies. "Buffett is really open to looking outside the U.S., and the Iscar deal is getting the word out," says Mohnish Pabrai, managing partner at Pabrai Investment Funds, which manages $500 million in assets.
Buffett, of course, could ultimately decide that no mega-deal fits the bill. He could buy a number of small companies, instead of going for one major, multibillion-dollar shot. But if he does make a play for a large company with a market value of more than $20 billion, here are a few that could work in his portfolio.
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Valero Energy: Buffett owns MidAmerican Energy Holdings, an energy producer. He might want to expand his energy exposure by adding Valero (VLO), America's largest oil-refining company, which also has a no-layoff policy. There just aren't that many refineries around, and no one is building many new ones. That makes Valero a potentially lucrative asset. Also, there's so much demand for gasoline that U.S. refineries have to run at close to full capacity. "There's high demand for its refineries, which are clearly in short supply today," says Cohan.
Valero isn't cheap. Its shares trade at $72.48, near their 52-week high, and its market cap is $44 billion. But it's a well-run company. And with $90 billion in annual sales, its debt load of $5.3 billion is relatively small.
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