Buffett finds slim pickings on the acquisition menu

Berkshire chief Warren Buffett with a pair of boxer shorts bearing a likeness of himself ahead of the company's annual meeting last Saturday. The billionaire investor's recent list of takeover targets seems equally short.
Berkshire chief Warren Buffett with a pair of boxer shorts bearing a likeness of himself ahead of the company's annual meeting last Saturday. The billionaire investor's recent list of takeover targets seems equally short.PHOTO: BLOOMBERG

Few cheap takeover targets and rivals chasing after same goals among reasons for lack of deals

NEW YORK • There is certainly no shortage of cash lying around at Berkshire Hathaway. Even so, Mr Warren Buffett's struggle to find the US$407 billion (S$574 billion) company's next meaningful acquisition shows that his relative buying power has diminished.

If you attended or streamed the shareholder meeting last week, you would have heard a lot about Berkshire's soaring cash pile, which stood at US$96.5 billion (S$136 billion) as of the March quarter. And it seems Mr Buffett is not getting calls from willing sellers the way he would like, or as he said:"It'd be more fun if the phone would ring."

Finding good takeover targets has proved so challenging, the billionaire hinted that should the cash continue to just accumulate he would have to consider returning some of it to Berkshire's investors via buybacks or a dividend.

It was a notable statement from Mr Buffett, who has long been against paying a dividend because his dealmaking could produce superior returns.  

But Berkshire shares have gained little more than 1 per cent this year, trailing the S&P 500 index, which is currently led by tech stocks.

With so much focus on Mr Buffett's next big deal, there are factors working against him.

First, a scarcity of cheap targets. Stocks are broadly more expensive than what Mr Buffett is used to paying. His success in making acquisitions is due partly to his ability to drive a bargain for strong companies with impressive management and attractive profit profiles. 

  • $574b

    Value of Berkshire Hathaway 

    $136b

    Value of Berkshire's cash pile, as of the March quarter.

But the S&P 500 has a trailing price-earnings ratio of about 21, compared with around 14 just five years ago. Acquirers have been paying record valuations for big transactions during the past year, even amid political uncertainty in the United States and Europe. 

Second, Berkshire is no longer the only buyer in town. It faces more competition than ever for takeovers, as the biggest companies in most industries are likely to turn to consolidation given a shortage of growth opportunities.

While it has always been viewed as an honour to sell to Mr Buffett, it may be getting tougher to reel in targets if other bidders come knocking with higher offer prices. 

Mr Buffett does not get involved in competitive processes, and it would be poor corporate governance to negotiate exclusively with him if superior offers could be on the table. 

A third reason relates to loyal managers. Mr Buffett wants to buy only companies that already have proven leaders dedicated to running the business for the long haul.

A confluence of factors is making that much more of a rarity nowadays. For example, baby boomers are nearing retirement age and activist hedge funds have been an impetus for turnover at the top of some big companies.

There simply are not as many family-run, mega-sized public corporations out there available for Mr Buffett's taking. 

The billionaire investor could have bought some time by announcing another deal with private equity firm 3G Capital and Kraft Heinz, which counts Berkshire and 3G as its largest shareholders.

Mr Buffett and 3G had been in the early stages of working on a merger between Kraft and Unilever, but the proposal leaked out to the press and Unilever quickly shut that door.

Buffett revealed last Saturday that Berkshire and 3G each would have contributed US$15 billion towards the transaction.

Now, the folks at 3G need to find another option, but the clock is ticking for them, too, as potential targets streamline their operations themselves and leave less for a would-be buyer to wring out of them.

Whether in conjunction with 3G or not, it is still likely that Berkshire will do a big transaction this year.

But it is certainly taking longer and proving harder than expected.

Some potential candidates that fit Mr Buffett's takeover criteria in terms of their returns and balance sheets include Hershey, Deere & Co, 3M and Nike.

But the simple truth is, Mr Buffett has set a high bar for deals and the list of companies that can reach it is getting shorter. 

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on May 11, 2017, with the headline 'Buffett finds slim pickings on the acquisition menu'. Print Edition | Subscribe